-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DYY9MFN/KEDp6rZgYR0hLo5LaPw+nU4nZgvt/Vg0fz7ISvhv6qZHblVByRdd8qmu Kt8CE4yIGxCqeEKjNEqs9w== 0000912057-96-013097.txt : 19960627 0000912057-96-013097.hdr.sgml : 19960627 ACCESSION NUMBER: 0000912057-96-013097 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960626 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTOLA PACKAGING INC CENTRAL INDEX KEY: 0000788983 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 941582719 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-95318 FILM NUMBER: 96585609 BUSINESS ADDRESS: STREET 1: 890 FAULSTICH CT CITY: SAN JOSE STATE: CA ZIP: 95112 MAIL ADDRESS: STREET 1: 890 FAULSTICH COURT CITY: SAN JOSE STATE: CA ZIP: 95112 POS AM 1 POS AM AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1996 REGISTRATION NO. 33-95318 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PORTOLA PACKAGING, INC. (Exact name of Registrant as specified in its charter) DELAWARE 3089 94-1582719 (State or other jurisdiction (Primary standard industrial (I.R.S. employer of classification code number) identification incorporation or organization) no.)
------------------------ 890 FAULSTICH COURT, SAN JOSE, CALIFORNIA 95112 (408) 453-8840 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ROBERT R. STRICKLAND CHIEF FINANCIAL OFFICER PORTOLA PACKAGING, INC., 890 FAULSTICH COURT, SAN JOSE, CALIFORNIA 95112 (408) 453-8840 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: TIMOTHY TOMLINSON, ESQ. CYNTHIA M. LOE, ESQ. Tomlinson Zisko Morosoli & Maser LLP 200 Page Mill Road, 2nd Floor Palo Alto, California 94306 (415) 325-8666 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTOLA PACKAGING, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus...................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors; Selected Historical Condensed Consolidated Financial Data 4. Use of Proceeds...................................... Status of the Offering, Use of Proceeds and Related Matters; Prospectus Summary; Use of Proceeds 5. Determination of Offering Price...................... Underwriting 6. Dilution............................................. Not Applicable 7. Selling Security Holders............................. Not Applicable 8. Plan of Distribution................................. Outside and Inside Front Cover Pages; Underwriting; Outside Back Cover Page 9. Description of Securities to be Registered........... Description of the Notes 10. Interests of Named Experts and Counsel............... Not Applicable 11. Information with Respect to the Registrant........... Status of the Offering, Use of Proceeds and Related Matters; Outside and Inside Front Cover Pages; Prospectus Summary; Risk Factors; Use of Proceeds; Capitalization; Selected Historical Condensed Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders; Description of the New Credit Facility; Description of the Notes; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Not Applicable
PORTOLA PACKAGING, INC. 10 3/4% SENIOR NOTES DUE 2005 SUPPLEMENT DATED JUNE 25, 1996 TO PROSPECTUS DATED SEPTEMBER 27, 1995 TABLE OF CONTENTS
PAGE ----- Status of the Offering, Use of Proceeds and Related Matters................................................ 1 Summary Historical Condensed Financial Data................................................................ 1 Business................................................................................................... 4 Management................................................................................................. 5 Certain Transactions....................................................................................... 12 Principal Stockholders..................................................................................... 14 Selected Historical Condensed Consolidated Financial Data.................................................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 19 Experts.................................................................................................... 25 Index to Financial Statements.............................................................................. F-1
This Supplement to the Prospectus of Portola Packaging, Inc. (the "Company" or "Portola") may be used by Chase Securities, Inc., an affiliate of the Company, in connection with offers and sales related to market making transactions in the 10 3/4% senior notes due 2005 (the "Notes"). Chase Securities, Inc. may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of sale. Chase Securities, Inc. will not confirm such sales to any accounts over which it exercises discretionary authority without the prior specific written approval of the customer. Chase Securities, Inc. and Salomon Brothers Inc (the "Underwriters") presently intend to make a market in the Notes; however, they are under no obligation to do so and may discontinue any market making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes or that an active public market will develop or, if developed, will continue. THIS SUPPLEMENT IS PART OF AND MUST BE ACCOMPANIED OR PRECEDED BY THE PROSPECTUS DATED SEPTEMBER 27, 1995 This Supplement is a part of and should be read in conjunction with the Prospectus dated September 27, 1995. Capitalized terms used in this Supplement and not otherwise defined in this Supplement shall have the meanings set forth in the Prospectus dated September 27, 1995 (the "Prospectus"). The Prospectus is hereby supplemented as follows: STATUS OF THE OFFERING, USE OF PROCEEDS AND RELATED MATTERS On October 2, 1995, the Company completed its offering of $110 million of Notes that mature on October 1, 2005 and bear interest at the rate of 10.75% per annum. Interest is payable semi-annually on April 1 and October 1 of each year. The Company paid interest in the aggregate amount of approximately $5,880,000 to holders of record of the Notes on April 1, 1996. The Notes are unsecured general obligations of the Company. The Notes were issued pursuant to and are governed by the terms of the Indenture between the Company and American Bank National Association, as trustee. Reference is made to the section of the attached Prospectus entitled "Description of the Notes" for a more complete description of the Notes. The net proceeds of the Note offering, after deducting expenses related to the offering, including underwriting discounts and commissions in the amount of approximately $3.2 million, were approximately $106 million. Of the $106 million net proceeds of the offering, $83 million was used to retire the Company's debt then outstanding under its senior term loans, revolving facility and senior subordinated notes, and the balance was reserved for working capital and general corporate purposes, including capital expenditures. Subsequent to the closing of the Note offering, $7.2 million of the net proceeds was used to purchase the San Jose facilities previously leased by the Company, $10.8 million of the net proceeds was used to purchase machinery and equipment, $3 million of the net proceeds was used to make a loan to the Company's 50% joint venture in Mexico, and $2 million of the net proceeds was used for working capital needs. Concurrent with the closing of the Note offering on October 2, 1995, the Company entered into a new five year senior revolving credit facility (the "New Credit Facility") with Heller Financial, Inc., a lender of certain of the debt retired with the net proceeds of the Note offering. The New Credit Facility provides for revolving loans to the Company in an aggregate amount not to exceed $35 million, subject to a borrowing base of eligible receivables, inventory, property, plant and equipment, which serve as collateral for the line. Loans made pursuant to the terms of the New Credit Facility constitute senior secured indebtedness of the Company. As of the date of this Supplement, the Company had no outstanding indebtedness under the New Credit Facility, leaving the entire facility available for draw. Reference is made to the section of the attached Prospectus entitled "Description of the New Credit Facility" for a more complete description of the terms of the New Credit Facility. SUMMARY HISTORICAL CONDENSED FINANCIAL DATA The information included in the sections of the Prospectus entitled "Summary Historical and Pro Forma As Adjusted Condensed Company -- Only Financial Data" and "-- Summary Historical and Pro Forma As Adjusted Condensed Consolidated Financial Data" is superseded in its entirety by the information set forth in the table below. The following table sets forth certain summary historical financial data for the Company. The summary historical statement of operations and balance sheet data for each of the fiscal years in the three year period ended August 31, 1995 and at the end of each such fiscal year have been derived from, and are qualified by reference to, the Company's audited consolidated financial statements included in this Supplement to the Prospectus. The summary historical statement of operations and balance sheet data for the six months ended February 28, 1995 and February 29, 1996 and at such dates have been derived from the unaudited consolidated financial statements of the Company included in this Supplement to the Prospectus. The table should be read 1 in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of the Company and related notes and other financial information appearing elsewhere in this Supplement to the Prospectus.
FISCAL YEAR ENDED SIX MONTHS ENDED AUGUST 31, ---------------------------- ----------------------------------------- FEB. 28, FEB. 29, 1993 1994 (A) 1995 1995 1996 ----------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales.................................. $ 58,286 $ 70,284 $ 124,650 $ 55,585 $ 73,877 Gross profit........................... 15,607 18,614 32,678 14,055 18,020 Income from operations................. 6,180 7,004 10,623 4,983 6,574 Interest expense, net.................. 3,044 3,899 8,483 3,931 5,696 Amortization of debt financing costs... 479 433 447 269 261 Income before extraordinary item, cumulative effect of change in accounting principle and income taxes................................. 2,719 2,195 1,434 961 555 Net income (loss)...................... 309 225 140 231 (1,465) Earnings (loss) per share.............. 0.02 (0.02) (0.04) 0.00 (0.16) BALANCE SHEET DATA (AT END OF PERIOD): Working capital........................ $ 7,109 $ 11,049 $ 14,758 $ 16,910 $ 32,354 Total assets........................... 50,896 110,820 130,326 109,150 156,557 Total debt............................. 38,140 77,467 91,912 82,723 117,798 Redeemable warrants (b)................ 2,600 3,055 3,665 3,055 4,088 Total shareholders' equity............. 2,597 5,393 6,694 8,775 4,822 CASH FLOW DATA: Net cash provided by (used in) operating activities.................. $ 6,768 $ 9,351 $ 8,422 $ (1,759) $ 8,559 Net cash used in investing activities............................ (9,119) (38,418) (24,648) (4,505) (16,010) Net cash provided by financing activities............................ 3,538 30,099 14,785 4,559 21,214 OPERATING AND OTHER DATA: Closure unit volume (in millions)...... 3,980 4,893 8,476 4,008 4,549 Closure unit volume growth (c)......... 5.8% 22.9% 73.2% 10.5% 13.5% EBITDA (d)............................. $ 12,883 $ 14,728 $ 23,588 $ 11,395 $ 14,330 Depreciation and amortization.......... 6,845 8,357 12,789 5,824 8,072 Capital expenditures................... 9,564 6,159 11,302 4,703 16,372 Ratio of earnings to fixed charges (e)................................... 1.3x 1.2x 1.2x 1.2x --
- ------------------------ (a) Includes ten months of operations before the Nepco acquisition on June 30, 1994 and two months of operations after the acquisition. Nepco is now a division of Portola. (b) The redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company's Common Stock. If the Company does not complete an initial public offering of its Common Stock by June 30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the holders may require the Company to repurchase the warrants at the higher of current market value or an amount computed under the warrants. 2 (c) These results reflect closure unit volume growth of the Company including Nepco after June 30, 1994. On a pro forma combined basis, the closure unit volume growth for Portola and Nepco was 11.6% for the fiscal year ended August 31, 1994. (d) EBITDA represents, for any relevant period, income (loss) before income taxes, extraordinary item, cumulative effect of change in accounting principle, depreciation of property, plant and equipment, interest expense, net, amortization of intangible assets and non-recurring legal expenses associated with the Company's litigation with Scholle Corporation through October 2, 1995. See "Business -- Litigation" in this Supplement to the Prospectus. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, net income, cash flow or other measures of performance in accordance with generally accepted accounting principles. EBITDA data and the related ratios are included because the Company understands that such information is used by certain investors as one measure of an issuer's historical ability to service debt and because certain restrictive covenants in the Indenture are based on a term very similar to the Company's EBITDA. (e) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" represents income before provision for income taxes and fixed charges. "Fixed charges" consist of interest expense, amortization of debt financing costs and the portion of lease expense which management believes is representative of the interest component of lease expense. The ratio of earnings to fixed charges for the six months ended February 29, 1996 resulted in a deficiency of $1.6 million. 3 BUSINESS The information included in the section of the Prospectus entitled "Business" is supplemented as set forth below. Please see the section of the Prospectus entitled "Business" for a more complete description of the Company's products, markets and business strategies. OVERVIEW Since the Company was acquired from the founding family in 1986 by a group led by Jack L. Watts, the Company's current Chairman of the Board and Chief Executive Officer, the size of the Company as measured by sales and closure unit volume has increased from $26.1 million in sales and 2.1 billion in units for fiscal 1987 to $124.7 million in sales and 8.5 billion in units for the fiscal year ended August 31, 1995. The size of the Company as measured by sales and closure unit volume was $100.5 million in sales and 6.1 billion in units for the eight months ended April 30, 1996. Mr. Watts and other members of senior management owned or controlled 29.1%, on a fully diluted basis (calculated on the basis of exercise of all outstanding options, vested and unvested, and conversion of the Class A Common Stock, which is non-voting stock, into voting stock), of the Common Stock of the Company as of June 18, 1996. BUSINESS STRATEGY The Company has continued to pursue various expansion opportunities, including its program of seeking to acquire domestic and foreign businesses serving similar customers using proprietary product and process technologies that offer opportunities to improve costs or extend the Company's product lines. The Company's international export sales were approximately $18.7 million for the fiscal year ended August 31, 1995 and approximately $9.2 million for the six months ended February 29, 1996, of which $6.7 million and $1.4 million, respectively, represented sales of PortaPlants (see "Business -- Products -- PortaPlants" in the attached Prospectus). PROPERTIES On February 9, 1996, the Company completed its acquisition of the Company's headquarters and manufacturing facilities located in San Jose, California, which facilities were previously leased by the Company. The purchase price paid in connection with such acquisition was approximately $7.2 million. The disclosures included on page 40 of the attached Prospectus are hereby amended accordingly to reflect the purchase by the Company of its San Jose facilities. The Company is currently negotiating an 18 to 24 month extension of the term of the lease for its facilities located in Clifton Park, New York, which facilities are reflected in the table included on page 40 of the attached Prospectus. The Company's Canadian subsidiary, Portola Packaging Canada Ltd., is now leasing the 43,000 square foot facility in Edmonton, Alberta, Canada that is described in the footnotes to the table included on page 40 of the attached Prospectus. SALES, MARKETING AND CUSTOMER SERVICE The Company's customer base includes more than 3,000 accounts. The Company's top ten customers and buying groups accounted for approximately 19% of the Company's sales during the six months ended February 29, 1996, and none accounted for more than 5% of sales during that period. LITIGATION As described in greater detail in the attached Prospectus, the Company has been engaged in patent infringement litigation with Scholle Corporation ("Scholle"), which commenced an action against the Company in the United States District Court, Northern District of California in July 1992 alleging that the Company infringed upon certain patents of Scholle relating to five gallon non-spill closures. In February 1995, the jury rendered a verdict adverse to the Company and in favor of Scholle, which verdict was entered by the court on January 2, 1996. All further motions were denied by the court upon entry of the jury verdict, making the Company liable for damages of $0.01 per closure unit sold. The Company is likely to have to pay $0.01 per closure unit in damages, totaling approximately 4 $1.4 million on sales through April 30, 1996, as well as on sales occurring thereafter. These amounts have been and will continue to be accrued in the Company's financial statements in the periods in which sales occurred or continue to occur. The Company is currently in the process of negotiating a settlement agreement with Scholle, the terms of which are expected to provide for the grant by Scholle of a non-exclusive license to use certain of its patents and the payment by the Company of a royalty in the amount of $0.01 per five gallon non- spill closure unit. It is anticipated that the Company would remain liable for damages of $0.01 per closure unit sold prior to the date of execution and delivery of the proposed form of settlement agreement. Interest at the rate of 10%, currently approximately $175,000, would be payable to Scholle on all past due amounts under the proposed agreement. The Company is also a party to a number of other lawsuits and claims arising out of the normal course of business. Management does not believe that the final disposition of these matters will have a material adverse effect on the financial condition or operations of the Company. MANAGEMENT The information included under the headings entitled "Executive Officers and Directors," "Director Compensation," "Executive Compensation," "Employee Benefit Plans" and "Compensation Committee Interlocks and Insider Participation" in the section of the Prospectus entitled "Management" is hereby superseded in its entirety as set forth below. No changes have occurred with respect to the disclosures included under the heading entitled "Indemnification of Directors and Officers" included in the section of the Prospectus entitled "Management." EXECUTIVE OFFICERS AND DIRECTORS The current executive officers and directors of the Company are as follows:
YEARS WITH NAME AGE COMPANY POSITION - -------------------------------- --- --------------- -------------------------------------------------------------- Jack L. Watts 48 10 Chairman of the Board and Chief Executive Officer Robert Plummer 37 2 President - Nepco Division Dannie K. Martz 44 0 President - Cap Snap Division Douglas L. Cullum 41 10 President - Packaging Division Robert R. Strickland 52 4 Vice President - Finance, CFO and Assistant Secretary E. Scott Merritt 40 1 Vice President - Manufacturing Technology Laurie D. Bassin 47 9 Vice President - Corporate Development Rodger A. Moody 42 20 Vice President, Managing Director - International Division Patricia Voll 38 0 Vice President - Finance and Accounting David A. Keefe 42 10 Corporate Controller Timothy Tomlinson (1) 46 10 Secretary and Director Larry C. Williams (1)(2) 46 7 Director Martin R. Imbler (2) 48 7 Director Christopher C. Behrens 35 2 Director Jeffrey Pfeffer, Ph.D. (1) 49 0 Director
- ------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Mr. Watts has been Chairman of the Board and Chief Executive Officer of the Company since January 1986. From 1982 to 1985, he was Chairman of the Board of Faraday Electronics, a supplier of integrated circuits and board level microprocessors. 5 Mr. Plummer has been Vice President and General Manager - Equipment Division from May 1994 to April 1996. In addition, he assumed responsibilities as President - Nepco Division in September 1995, a position he still currently holds. From May 1989 to May 1994, he was employed by General Motors Corporation: as an Assembly Advisor for New United Motor Manufacturing, Inc., an automobile manufacturing joint venture between General Motors and Toyota from February 1993 to May 1994 and as Product Manager of the Harrison Division of General Motors Corporation, which produces automotive engine cooling and heating, ventilating, and air conditioning systems, from May 1989 to February 1993. Mr. Martz has been President - Cap Snap Division since September 1995. From March 1995 to September 1995, he was Senior Vice President of Cymer Laser Technologies, a laser manufacturer. From January 1992 to March 1995, he was Vice President and General Manager of the Varian - TEL Products Division of Varian Associates, Inc., a manufacturer of semiconductor equipment, electrical devices, instruments and other electronics products, and from October 1986 to January 1992, he was employed by KLA Instruments Corporation, a company involved in the factory automation, manufacturing, photonics, and test and measurement industries, most recently as Vice President and General Manager, Automated Test Systems Division. Mr. Cullum has been President - Packaging Division since April 1996. He was Vice President - Manufacturing Technology of the Company from November 1994 to April 1996. He joined the Company in 1986 and became Vice President - Operations of the Cap Snap Division in April 1987. Mr. Strickland has been Vice President - Finance and Chief Financial Officer of the Company since July 1991. From September 1990 to July 1991, he served as Senior Vice President and Chief Financial Officer at Personics Corporation, a company that manufactured a system of producing audio cassette tapes in retail record stores. From February 1988 to June 1990, he was employed by Lucky Stores, Inc., a supermarket chain, most recently as Vice President Finance and Administration. Mr. Merritt has been Vice President - Manufacturing Technology since April 1996. He was Vice President and General Manager - Fitment Equipment from February 1995 until April 1996. From August 1992 to February 1995, he was an Advisor, General Assembly for New United Motor Manufacturing, Inc., an automobile manufacturing joint venture between General Motors and Toyota. From 1978 to August 1992, he was employed by General Motors of Canada, Ltd., where he held various positions, most recently as Manufacturing Superintendent - Components Plant. Ms. Bassin has been Vice President - Corporate Development of the Company since February 1993. From August 1986 to February 1993, she was Director of Marketing of the Company. Prior to that time, she was employed in the Consumer Service and Marketing Department of Collagen Corporation, a biomedical company. Mr. Moody has been Vice President - Managing Director - International Division of the Company since October 1994. He has been with the Company since 1975 and has worked in a variety of functional areas, including production, administration, marketing/sales, equipment and general management. Ms. Voll joined the Company in April 1996 as Vice President, Finance and Accounting. From February 1993 to September 1995, she was employed by Trinzic Corporation, a software company, most recently as Vice President, Finance, Chief Financial Officer, Treasurer and Secretary. From June 1991 to January 1993, she was employed by Pyramid Technology, Inc., a computer hardware manufacturer, as Director of Accounting. From 1986 to 1991, she was employed by Ingres Corporation, a software company, where she held various management positions, most recently as Corporate Controller. Mr. Keefe has been Corporate Controller of the Company since February 1986. 6 Mr. Tomlinson has been Secretary and a director of the Company since January 1986. He also serves as a director of Oak Technology, Inc., a designer and marketer of multimedia semiconductors and related software. He has been a partner in the law firm of Tomlinson Zisko Morosoli & Maser LLP since 1983. Mr. Williams has been a director of the Company since January 1989. He founded The Breckenridge Group, Inc., an investment banking firm in Atlanta, Georgia, in April 1987 and is one of its principals. Mr. Imbler has been a director of the Company since March 1989. He has been President, Chief Executive Officer and a director of Berry Plastics Corporation ("Berry"), a manufacturer of plastic packaging, since January 1991. He has also served as a director of BPC Holding Corporation, an entity affiliated with Berry, since 1991. From July 1987 to January 1991, he was President and Chief Executive Officer of Risdon Corporation, a cosmetic packaging company. Mr. Behrens has been a director of the Company since June 1994. He has been an officer of The Chase Manhatten Bank, N.A. ("Chase Bank") since 1986 and an officer of Chase Capital Partners ("Chase Capital") since 1990. Mr. Behrens is a director of The Pantry, Inc. and numerous private companies. Dr. Pfeffer has been a director of the Company since May 1996. He has been a professor in the Graduate School of Business at Stanford University since 1979, except for the 1981-1982 academic year, when he served as the Thomas Henry Carroll-Ford Foundation Visiting Professor of Business Administration at the Harvard Business School, and currently holds the Thomas D. Dee Professor of Organizational Behavior chair. Each director listed above, except Dr. Pfeffer, was elected at the Company's Annual Meeting of Shareholders held in January 1996 and will serve until his successor has been elected and qualified or until his earlier resignation or removal. Dr. Pfeffer was elected by Unanimous Written Consent of the Board of Directors of the Company effective as of May 19, 1996 and will serve until his successor has been elected or qualified or until his earlier resignation or removal. Executive officers are chosen by, and serve at the discretion of, the Board. DIRECTOR COMPENSATION Each of Dr. Pfeffer and Messrs. Imbler, Tomlinson and Williams receives as compensation for his services as a director $2,500 per quarter, and $2,000 for each meeting of the Board attended, and is reimbursed for his reasonable expenses in attending Board meetings. None of the other Board members is compensated as such. See "Management -- Compensation Committee Interlocks and Insider Participation" in this Supplement to the Prospectus. Each of Messrs. Imbler and Williams receives an annual retainer for his services as a member of the Audit Committee of the Board in the amount of $4,000 paid on a quarterly basis. Mr. Tomlinson receives an annual retainer for his services as an alternate member of the Audit Committee of $4,000 paid on a quarterly basis. Each of Dr. Pfeffer and Messrs. Tomlinson and Williams receives an annual retainer for his services as a member of the Compensation Committee of the Board of Directors in the amount of $4,000 paid on a quarterly basis. EXECUTIVE COMPENSATION The following table summarizes all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during the fiscal years ended August 31, 1995 and 1994 by the Company's Chief Executive Officer and the Company's six other most highly compensated executive officers during fiscal 1995 (together, the "Named Officers"). The table includes one executive officer who has resigned and one executive officer who is currently involved only in special projects. 7 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ----------------- ----------------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2) OPTIONS COMPENSATION (3) - -------------------------------------- --------- ----------- ----------- ---------------- ----------------- ----------------- Jack L. Watts 1995 $ 232,280 $ 62,502 $ 50,251 -- $ 3,015 Chairman of the Board and 1994 201,093 150,000 50,373 -- 6,999 Chief Executive Officer John L. Lemons (4) 1995 235,171 283,398 -- -- 8,570 President 1994 215,913 78,000 8,188 -- 7,839 Robert Plummer (5) 1995 167,955 13,900 -- -- 2,260 President - Nepco 1994 36,346 5,700 -- -- -- Division Howard R. Girbach (6) 1995 162,011 2,040 7,200 -- 3,015 Corporate Vice 1994 149,261 29,300 7,200 -- 2,404 President Robert R. Strickland 1995 150,974 2,040 -- -- 3,015 Vice President - 1994 133,443 57,500 -- -- 2,404 Finance and Chief Financial Officer Douglas L. Cullum (7) 1995 143,042 9,940 -- -- 3,015 President - Packaging 1994 136,839 16,300 -- -- 2,404 Division Roger A. Moody 1995 116,328 29,940 2,300 -- 2,848 Vice President, 1994 120,038 18,000 1,349 -- 2,404 Managing Director - International
- ------------------------ (1) With respect to 1995, includes bonuses paid during fiscal 1996 for services rendered during fiscal 1995, but not bonuses paid during fiscal 1995 for services rendered during fiscal 1994. With respect to 1994, includes bonuses paid during fiscal 1995 for services rendered during fiscal 1994, but not bonuses paid during fiscal 1994 for services rendered during fiscal 1993. (2) Includes automobile and gas allowances and, with respect to Mr. Watts, $41,800 in consulting fees paid in both fiscal 1995 and 1994 to PPI Management, Inc., a corporation of which Mr. Watts is the sole shareholder and employee. (3) Represents insurance premiums on term life insurance of $4,595 for Mr. Watts for fiscal 1994 and insurance premiums on term life insurance of $6,470 and $5,435 for Mr. Lemons for fiscal 1995 and 1994, respectively. In addition, represents a Company profit-sharing contribution of $2,100 and $2,304 for fiscal 1995 and 1994, respectively, and a Company 401(k) matching contribution of $100 for each of the Named Officers (except for Mr. Plummer) for fiscal 1994, and a Company 401(k) matching contribution of up to 1% of salary, depending on the employee's contribution to the plan for fiscal 1995. (4) Mr. Lemons resigned as President and a director of the Company effective as of October 10, 1995. (5) Mr. Plummer joined the Company in May 1994. 8 (6) As of fiscal year end 1995, Mr. Girbach was President - Packaging Division. He resigned from such position in April 1996 and is currently a Corporate Vice President working on special projects. (7) As of fiscal year end 1995, Mr. Cullum was Vice President - Manufacturing Technology. He became President of the Packaging Division in April 1996. The following table sets forth information concerning individual grants of stock options made during fiscal year 1995 to the Named Officers. OPTION/SAR GRANTS IN FISCAL 1995
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF % OF TOTAL RATES OF STOCK PRICE SECURITIES OPTIONS/SARS EXERCISE OR APPRECIATION FOR UNDERLYING GRANTED TO BASE OPTION TERM OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ------------------------ NAME GRANTED (1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)(3) - --------------------------------- ------------- --------------- ----------- ----------- ----------- ----------- Robert Plummer................... 54,000 15.5% $ 4.00 8/25/2005 $ 135,841 $ 344,248
- ------------------------ (1) There are no stock appreciation rights. The options vest according to the following schedule: 10,800 shares vested as of June 1, 1996, and 2,700 shares vest upon the first day of each calendar quarter thereafter until June 1, 2000, at which time these options will be fully vested. (2) The exercise price on the date of grant was equal to 100% of the fair market value on the date of grant. (3) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. The following table sets forth certain information regarding option exercises during fiscal year 1995 and the number of shares covered by both exercisable and unexercisable stock options as of August 31, 1995 for each of the Named Officers. AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES OPTIONS AT AUGUST 31, 1995 AUGUST 31, 1995 (1) ACQUIRED ON VALUE -------------------------- -------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------- ----------- --------- ----------- ------------- ----------- ------------- Jack L. Watts.................... -- $ -- -- -- $ -- $ -- John L. Lemons (2)............... -- -- -- -- -- -- Robert Plummer................... 10,000 -- 10,000 84,000 15,000 45,000 Howard R. Girbach (3)............ -- -- 48,000 92,000 72,000 138,000 Robert R. Strickland............. -- -- 64,000 16,000 144,000 36,000 Douglas L. Cullum................ 25,000 84,750 55,000 -- 186,450 -- Roger A. Moody................... -- -- 40,000 -- 135,600 --
- ------------------------ (1) The value of an "in-the-money" option represents the difference between the estimated fair market value of the underlying securities at August 31, 1995 of $4.00 per share, as determined by the Company's Board of Directors, minus the exercise price of the options. (2) Mr. Lemons resigned as President and as a director of the Company effective as of October 10, 1995. (3) Mr. Girbach resigned as President of the Packaging Division in April 1996 and is currently a Corporate Vice President working on special projects. 9 EMPLOYEE BENEFIT PLANS 1988 STOCK OPTION PLAN. The 1988 Stock Option Plan (the "1988 Plan") was adopted by the Board in September 1988 and approved by the Company's shareholders in May 1989. The 1988 Plan has been terminated, although options granted under the 1988 Plan remain outstanding. As of June 18, 1996, a total of 1,154,010 shares of Class B Common Stock, Series 1 were subject to issuance with respect to outstanding options granted under the 1988 Plan. Options were granted under the 1988 Plan to officers, key employees and independent contractors of the Company, or any subsidiary of the Company. Options granted under the 1988 Plan were incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options ("NQSOs"); however, only employees of the Company, or of a parent or subsidiary of the Company, could have been granted ISOs. Generally, options under the 1988 Plan expire ten years after the date of grant (generally subject to shortened exercisability periods for terminated employees). The 1988 Plan may be administered by the Board or by a committee appointed by the Board. The 1988 Plan is currently administered by the Board. The exercise price of an option granted under the 1988 Plan may not be less than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair market value of the Company's Class B Common Stock, Series 1 on the date of grant, except that, for an ISO granted to a person holding 10% or more of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, the exercise price must be not less than 110% of such fair market value. Options generally become exercisable as to 20% of the shares one year after the vesting start date and as to an additional 5% of the shares for each full quarter thereafter that the optionee renders services to the Company. 1994 STOCK OPTION PLAN. The 1994 Stock Option Plan (the "1994 Plan") was adopted by the Board and the Company's shareholders in November 1994. The 1994 Plan will terminate on November 17, 2004 (although options granted under the 1994 Plan may be exercised subsequent to such date) or such earlier time as all of the shares of Class B Common Stock, Series 1 reserved thereunder have been issued. A total of 1,000,000 shares of Class B Common Stock, Series 1 has been reserved for issuance under the 1994 Plan. As of June 18, 1996, a total of 4,300 shares of Class B Common Stock, Series 1 had been issued pursuant to option exercises under the 1994 Plan, a total of 601,500 shares of Class B Common Stock, Series 1 were subject to issuance with respect to options granted under the 1994 Plan and a total of 394,200 shares remained available for future grants under the 1994 Plan. Options may be granted under the 1994 Plan to officers, key employees and independent contractors of the Company, or any subsidiary of the Company. Options granted under the 1994 Plan may be ISOs within the meaning of Section 422 of the Code, or NQSOs; however, only employees of the Company, or of a parent or subsidiary of the Company, may be granted ISOs. Generally, options under the 1994 Plan expire ten years after the date of grant (subject to shortened exercisability periods for terminated employees). The 1994 Plan allows a maximum term of ten years from the date the option is granted (or five years in the case of any option granted to the holder of 10% or more of the shares of the Company). The 1994 Plan may be administered by the Board or by a committee appointed by the Board, which has discretion to select optionees and to establish the terms and conditions of the options, subject to the provisions of the 1994 Plan. The 1994 Plan is currently administered by the Compensation Committee. The exercise price of an option granted under the 1994 Plan may not be less than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair market value of the Company's Class B Common Stock, Series 1 on the date of grant, except that, for an ISO granted to a person holding 10% or more of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, the exercise price must be not less than 110% of such fair market value. 10 Options generally become exercisable as to 20% of the shares one year after the vesting start date and as to an additional 5% of the shares for each full quarter thereafter that the optionee renders services to the Company. As of June 18, 1996, under both the 1988 and 1994 Plans, options to purchase an aggregate of 1,621,490 shares of Class B Common Stock, Series 1 had been exercised, directors, officers, consultants and other employees held non-qualified stock options to purchase an aggregate of 1,154,010 shares, with a weighted average exercise price of $1.32, and directors, officers and other employees held incentive stock options to purchase an aggregate of 601,500 shares, with a weighted average exercise price of $4.18. 401(K) PLAN. In 1987, the Company's Board of Directors adopted a profit sharing plan that is intended to qualify under Section 401(k) of the Code (the "401(k) Plan"). Each employee of the Company who is at least 21 years of age, has completed one year of service and is not covered by a collective bargaining agreement is eligible to participate in the 401(k) Plan. A participating employee may make pre-tax contributions of up to 10% of such employee's compensation that does not exceed the Social Security Wage Base ("Eligible Compensation Base") in effect at the end of the plan year. The Company makes matching contributions that, beginning in fiscal 1995, are 20% of the employee's contribution, up to a maximum employee contribution of 5% of salary. In addition, the Company may, at the discretion of the Board of Directors, make profit-sharing contributions. In fiscal 1993, fiscal 1994 and fiscal 1995, the Company contributed 3.0%, 4.0% and 3.0%, respectively, of each participant's Eligible Compensation Base as profit sharing contributions for those years. 1996 EMPLOYEE STOCK PURCHASE PLAN. The Company's Board of Directors has authorized the adoption of an Employee Stock Purchase Plan that is intended to qualify under Section 423 of the Code (the "Purchase Plan"). It is anticipated that the Purchase Plan will incorporate the provisions described below. The maximum number of shares to be issued under the Purchase Plan will be 750,000 shares of Class B Common Stock, Series 1. Participation will be available to all employees of the Company (other than certain part-time and seasonal employees and employees possessing 5% or more of the total combined voting power or value of all classes of the Company's stock) who have been with the Company at least one month prior to the commencement of an offering under the Purchase Plan. The Purchase Plan will be implemented through consecutive offerings of twelve months duration commencing on January 1 of each year, except for the initial offering period. Eligible employees may participate only through payroll withholding. At the employee's election, from 1% to 10% of the employee's compensation will be withheld. The price at which employees will purchase shares will be 85% of the lower of the fair market value of the stock at the beginning of the offering period (January 1 of the applicable year, except for the initial offering period) or the fair market value of the stock at the end of the offering period (December 31 of the applicable year). No employee will be entitled to purchase shares at a rate which exceeds $25,000 in fair market value for each calendar year in which the employee participates in the Purchase Plan. Implementation of the Purchase Plan is subject to approval by the Compensation Committee and to stockholder approval. 1996 EMPLOYEE PERFORMANCE UNIT BONUS PLAN. The Company's Board of Directors has authorized the adoption of the 1996 Employee Performance Unit Bonus Plan (the "Bonus Plan") pursuant to which units representing hypothetical shares of the stock of the Company are credited to an employee's account. Cash or stock dividends and splits attributable to such are also credited to the employee's account. Upon a specified date or the happening of a certain event, the employee is entitled to receive an amount equal to the excess (if any) of the fair market value of the hypothetical stock represented by the units over the value of such stock on the date on which the units were awarded. The Bonus Plan provides for the issuance of up to 1,000,000 units thereunder. The Board has authorized the issuance of 100,000 units to Mr. Watts, with each unit having a value of $4.50. Implementation of the Bonus Plan is subject to approval of the Compensation Committee. 11 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Company's Board of Directors are Timothy Tomlinson, Larry C. Williams and Jeffrey Pfeffer, Ph.D. Mr. Tomlinson is also the Company's Secretary. In 1989, the Company granted to Mr. Tomlinson and TZM Investment Fund, of which Mr. Tomlinson is a general partner, options to purchase 124,026 shares of Class B, Series 1 Common Stock for $1.00 per share. A portion of those options were exercised during the period from December 1989 to September 1991, for 66,000 shares of Class B, Series 1 Common Stock and, during the period from January through April 1995, for 28,042 shares of Class B, Series 1 Common Stock. TZM Investment Fund continues to hold the balance of the options. In 1991, TZM Investment Fund received from the Company, and continues to hold, options to purchase 90,000 shares of the Company's Common Stock for $1.75 per share. In 1989, the Company granted to Mr. Williams and other principals of The Breckenridge Group, Inc. ("Breckenridge"), an investment banking firm of which Mr. Williams is a principal, options to purchase 124,026 shares of Class B, Series 1 Common Stock for $1.00 per share (Mr. Williams received options to purchase 33,720 of such shares). Such principals of Breckenridge have exercised a portion of those options, purchasing, during the period from December 1989 to September 1991, 66,000 shares of Class B, Series 1 Common Stock (17,670 of which were purchased by Mr. Williams), and such principals continue to hold the balance of the options (Mr. Williams continues to hold options to purchase 16,050 shares). The Company retains as its general counsel the law firm of Tomlinson Zisko Morosoli & Maser LLP, of which Mr. Tomlinson is a general partner. For legal services rendered during fiscal 1993, 1994 and 1995, the Company paid Mr. Tomlinson's law firm $451,000, $420,000 and $333,000, respectively, including expenses. In March 1992, the Company engaged Breckenridge to act as investment banker in a possible equity financing and as a finder for the purposes of introducing the Company to one or more financial institutions to provide a senior financing loan package. In fiscal 1992, the Company paid Breckenridge a $350,000 fee for assistance in preparing a confidential private placement memorandum for a possible equity offering and in evaluating the offering. In fiscal 1993, the Company paid Breckenridge a $200,000 finder's fee, plus expense reimbursement of $11,000, in connection with the closing of a new senior financing loan package. In fiscal 1996, Breckenridge acted as a finder in the sale of Common Stock of the Company held by certain insiders of the Company. Breckenridge received fees and expenses in the amount of $495,865 from the proceeds of the sale. For additional information regarding Messrs. Tomlinson and Williams and their respective affiliates, see the sections entitled "Management -- Executive Officers and Directors" and "Principal Stockholders" included in this Supplement to the Prospectus. Reference is also made to the section entitled "Certain Transactions -- Transactions with Entities Affiliated with Directors" included in this Supplement and in the attached Prospectus. CERTAIN TRANSACTIONS The information included in the section of the Prospectus entitled "Certain Transactions" is hereby supplemented as follows: LOANS TO EMPLOYEES The Board of Directors of the Company has agreed to extend until January 1997 the due date of all principal and accrued interest owing to the Company by Jack L. Watts under the terms of that certain loan made by the Company to Mr. Watts in the original principal amount of $250,000. Reference is made to the attached Prospectus for a description of the terms of this loan and the terms of the loans extended to other employees of the Company. 12 TRANSACTIONS WITH ENTITIES AFFILIATED WITH DIRECTORS Expenditures in the amount of $5,000 were made in fiscal 1995 for mold development, engineering or manufacturing services performed by Berry Plastics Corporation, the President and Chief Executive Officer of which is Martin Imbler, who also serves as a director of the Company. Since June 1988, Chase Bank had held the Company's Senior Subordinated Notes in the principal amount of $10.0 million and due June 30, 2002. The Senior Subordinated Notes were repaid in full with the net proceeds of the Note offering October 2, 1995. Such payment included $10 million of principal, $7,500 of interest, a prepayment premium of $147,800 and $1,500 of other fees and expenses. In each of fiscal 1993, 1994 and 1995, the Company paid Chase Bank interest on this indebtedness of $1.35 million. The Company paid refinancing amendment and advisory fees of approximately $1 million and $258,000 to Chase Bank during fiscal 1993 and 1994, respectively. No such payments were made in fiscal 1995. Chase Bank is an affiliate of Chase Securities, Inc., Chase Capital and Chase Manhattan Capital Corporation, which, together with other related parties, owns approximately 24% of the Company's outstanding voting capital stock. Chase Bank was one of the Underwriters in the offering of the Notes, and currently makes a market in the Notes. Christopher C. Behrens, a director of the Company, is also a Vice President of Chase Bank and Chase Capital. See also the section entitled "Principal Stockholders" set forth in this Supplement. In October 1995, Breckenridge acted as a finder in the sale of Class A Common Stock of the Company by Jack Watts, John Lemons, LJL Cordovan Partners, L.P., and Robert Fleming Nominees Limited (collectively, the "Sellers") to an unrelated third party. Breckenridge received fees and expenses in the amount of $495,865 from the proceeds of the sale. Just prior to the sale, portions of the Sellers' individual holdings of Class B Common Stock, Series 1 and Series 2, were exchanged for Class A Common Stock of the Company. The Class A Common Stock of the Company is nonvoting and convertible only in the event that shares of the Class B, Series 1 Common Stock of the Company are sold in a public offering or there is a capital reorganization or reclassification of the capital stock of the Company. Reference is made to the section entitled "Management -- Compensation Committee Interlocks and Insider Participation" in this Supplement and to the section entitled "Certain Transactions" in the attached Prospectus for additional information regarding transactions involving the Company and Breckenridge. For information concerning certain transactions between the Company and Timothy Tomlinson, Larry C. Williams or their respective affiliates, see "Management -- Compensation Committee Interlocks and Insider Participation" in this Supplement to the Prospectus. Messrs. Tomlinson and Williams are directors of the Company and are also members of the Compensation Committee of the Board of Directors. 13 PRINCIPAL STOCKHOLDERS Reference is made to the section of the Prospectus entitled "Principal Stockholders," which is superseded in its entirety as set forth below. The following table sets forth certain information with respect to beneficial ownership of each class of the Company's voting securities as of June 18, 1996 by (i) each person known by the Company to be the beneficial owner of more than 5% of such class, (ii) each director, (iii) each Named Officer and (iv) all executive officers and directors as a group.
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF TITLE OF CLASS (1) NAME OF BENEFICIAL OWNER (2) OWNERSHIP (3) CLASS (3) - -------------------------------------- ----------------------------------------- ------------------ ------------- Class B Common Stock, Series 1 Jack L. Watts (4) 3,898,021 40.3% Class B Common Stock, Series 2 Robert Fleming Nominees Limited, a United 355,715 3.4% Kingdom Corporation (5) Class B Common Stock, Series 1 Christopher C. Behrens (6) 1,552,333 16.0% Class B Common Stock, Series 1 Chase Manhattan Capital Corporation (7) 1,552,333 16.0% Class B Common Stock, Series 2 Christopher C. Behrens (6) 815,715 8.4% Class B Common Stock, Series 2 Chase Manhattan Capital Corporation (7) 815,715 8.4% Class B Common Stock, Series 1 Gary L. Barry (8) 607,965 6.3% Class B Common Stock, Series 1 Timothy Tomlinson (9) 245,984 2.5% Class B Common Stock, Series 1 Howard Girbach (10) 124,000 1.3% Class B Common Stock, Series 1 Roger A. Moody (11) 106,650 1.1% Class B Common Stock, Series 1 Robert R. Strickland (12) 100,000 1.0% Class B Common Stock, Series 1 Douglas L. Cullum (13) 70,000 * Class B Common Stock, Series 1 Larry C. Williams (14) 66,371 * Class B Common Stock, Series 1 Robert Plummer (15) 40,800 * Class B Common Stock, Series 1 Martin R. Imbler (16) 20,000 * Class B Common Stock, Series 1 Jeffrey Pfeffer, Ph.D. (17) 15,000 * Class B Common Stock, Series 1 All executive officers and directors as a 7,341,786 72.1% and Series 2 group (16 persons) (18)
- ------------------------ * Less than one percent (1) The Company's Class B Common Stock, Series 1 and Class B Common Stock, Series 2 have the same voting rights, each share being entitled to one vote. The Class B Common Stock, Series 2 has a liquidation preference equal to $0.60 on each distributed dollar in the event that the value of the Company's assets available for distribution is less than $1.75 per share. Each share of Class B Common Stock, Series 2 is convertible at any time at the option of the holder into one share of Class B Common Stock, Series 1 and will be automatically converted into one such share (i) in the event that shares of Class B Common Stock, Series 1 shall be sold in a firm commitment public offering in which the aggregate public offering price is not less than $10,000,000 or (ii) immediately prior to the effectiveness of a merger or consolidation in which the Company is not the surviving entity and in which the value of the property to be received by the stockholders shall be not less than $1.75 per share. As of June 18, 1996, there were 9,678,070 shares of Class B Common Stock issued and outstanding, consisting of 8,506,640 shares of Class B Common Stock, Series 1 and 1,171,430 shares of Class B Common Stock, Series 2. As of June 18, 1996, there were 2,134,992 shares of Class A Common Stock issued and outstanding. Additionally, immediately exercisable warrants to purchase 2,492,741 shares of Class A Common Stock were outstanding. Chase Capital holds 2,052,526 of such warrants and Heller Financial, Inc. holds 440,215 of such warrants. The Class A Common Stock is non-voting and each share of Class A Common Stock may be converted into one share of Class B Common Stock, Series 1 in the event that shares of Class B 14 Common Stock, Series 1 shall be sold in a firm commitment public offering in which the aggregate public offering price is not less than $10,000,000 or there is a capital reorganization or reclassification of the capital stock of the Company. (2) Mr. Lemons is not included in the table because he sold all of his holdings of the capital stock of the Company upon his resignation as an officer and a director of the Company on October 10, 1995. (3) In accordance with the rules of the Securities and Exchange Commission, shares are beneficially owned by the person who has or shares voting or investment power with respect to such shares. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Common Stock subject to options that are exercisable within 60 days of June 18, 1996 are deemed to be outstanding and to be beneficially owned by the person holding such option for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (4) Includes 529,712 shares held by LJL Cordovan Partners, L.P., of which Mr. Watts is the general partner, and 52,132 shares held by trusts for the benefit of Mr. Watts' children. Mr. Watt's address is 890 Faulstich Court, San Jose, California 95112. (5) Includes 1,756 shares of Class B Common Stock, Series 2 held by Lochside Nominees Limited. The address of this shareholder is c/o Robert Fleming & Co. Ltd., 25 Copthall Avenue, London, England EC2R 7DR. (6) Mr. Behrens is a principal of Chase Capital Partners, an affiliate of Chase Manhattan Capital Corporation. Does not include warrants held by Chase Manhattan Capital Corporation to purchase 2,052,526 shares of Class A Common Stock at $0.60667 per share, which shares are non-voting. Mr. Behrens disclaims beneficial ownership of the 1,552,333 shares of Class B Common Stock, Series 1 and the 815,715 shares of Class B Common Stock, Series 2 owned by Chase Manhattan Capital Corporation and affiliates. The address of this shareholder is Chase Capital Partners, 380 Madison Avenue, New York, New York 10017. (7) With respect to Class B Common Stock, Series 1, includes 149,047 shares held by Archery Partners and 99,800 shares held by Baseball Partners, affiliates of Chase Manhattan Capital Corporation. With respect to Class B Common Stock, Series 2, includes 39,620 shares held by Archery Partners and 50,000 shares held by Baseball Partners. Does not include warrants held by Chase Manhattan Capital Corporation to purchase 2,052,526 shares of Class A Common Stock at $0.60667 per share, which shares are non-voting. The address of this shareholder is Chase Capital Partners, 380 Madison Avenue, New York, New York 10017. (8) Mr. Barry's address is 640 Menlo Avenue, Suite 5, Menlo Park, California 95025. (9) Includes 40,000 shares held by First TZMM Investment Partnership, of which Mr. Tomlinson is a general partner, 66,000 shares held by TZM Investment Fund of which Mr. Tomlinson is a general partner and 119,984 shares subject to options held by TZM Investment Fund that are exercisable within 60 days of June 18, 1996. Mr. Tomlinson's address is 200 Page Mill Road, Second Floor, Palo Alto, California 94306. (10) Includes 64,000 shares subject to options exercisable within 60 days of June 18, 1996. Mr. Girbach's address is 890 Faulstich Court, San Jose, California 95112. (11) Includes 40,000 shares subject to options exercisable within 60 days of June 18, 1996. Mr. Moody's address is 890 Faulstich Court, San Jose, California 95112. (12) Includes 80,000 shares subject to options exercisable within 60 days of June 18, 1996. Mr. Strickland's address is 890 Faulstich Court, San Jose, California 95112. 15 (13) Includes 55,000 shares subject to options exercisable within 60 days of June 18, 1996. Mr. Cullum's address is 890 Faulstich Court, San Jose, California 95112. (14) Includes 16,050 shares subject to options exercisable within 60 days of June 18, 1996. Does not include (i) 123,756 shares and (ii) 41,976 shares subject to options exercisable within 60 days of June 18, 1996, held in the individual names of four other principals of The Breckenridge Group, Inc. Mr. Williams' address is Resurgens Plaza, Suite 2100, 945 E. Paces Ferry Road, Atlanta, Georgia 30326. (15) Includes 30,800 shares subject to options exercisable within 60 days of June 18, 1996. Mr. Plummer's address is 890 Faulstich Court, San Jose, California 95112. (16) Mr. Imbler's address is 101 Oakley Street, Evansville, Indiana 47706-0959. (17) Dr. Pfeffer's address is Graduate School of Business, Stanford University, Stanford, California 94305-5015. (18) Includes all of the shares shown as included in footnotes (4), (6), and (9) through (17). 16 SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA The information included in the section of the Prospectus entitled "Selected Historical Condensed Consolidated Financial Data" is superseded in its entirety by the information set forth below. The selected historical condensed consolidated statement of operations and balance sheet data set forth in the table below for, and at the end of, each of the fiscal years in the five year period ended August 31, 1995 have been derived from, and are qualified by reference to, the consolidated financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected historical condensed consolidated statement of operations and balance sheet data for the six months ended February 28, 1995 and February 29, 1996, and at February 28, 1995 and February 29, 1996, are derived from unaudited consolidated financial statements of the Company and, in the opinion of the management of the Company, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations of the interim periods. Results for the six months ended February 28, 1995 and February 29, 1996 are not necessarily indicative of the results that may be expected for the full fiscal year. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of the Company and the accompanying notes thereto and other financial information appearing elsewhere in this Supplement to the Prospectus.
SIX MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, ---------------------- ---------------------------------------------------------- FEB 28 FEB 29 1991 1992 1993 1994(A) 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales..................................... $ 48,204 $ 52,152 $ 58,286 $ 70,284 $ 124,650 $ 55,585 $ 73,877 Cost of sales............................. 34,658 37,676 42,679 51,670 91,972 41,530 55,857 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit............................ 13,546 14,476 15,607 18,614 32,678 14,055 18,020 Selling, general and administrative....... 5,522 6,046 7,207 8,821 16,649 6,986 8,245 Research and development.................. 557 915 820 764 1,682 521 1,007 Amortization of intangibles (b)........... 1,440 1,421 1,400 2,025 3,724 1,565 2,194 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income from operations.................. 6,027 6,094 6,180 7,004 10,623 4,983 6,574 Other (income) expenses, net (c).......... (35) 632 (62) 477 259 (178) 62 Interest expense, net..................... 3,888 3,147 3,044 3,899 8,483 3,931 5,696 Amortization of debt financing costs...... 418 365 479 433 447 269 261 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before extraordinary item, cumulative effect of change in accounting principle and income taxes.................................. 1,756 1,950 2,719 2,195 1,434 961 555 Income taxes (d).......................... 1,301 1,287 1,521 1,095 1,294 730 755 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle................... 455 663 1,198 1,100 140 231 (200) Extraordinary item, net (e)............... -- -- 889 790 -- -- 1,265 Cumulative effect of change in accounting principle (d)............................ -- -- -- 85 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)......................... $ 455 $ 663 $ 309 $ 225 $ 140 $ 231 $ (1,465) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per share............... $ 0.04 $ 0.05 $ 0.02 $ (0.02) $ (0.04) $ 0.00 $ (0.16) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital........................... $ 2,867 $ 2,920 $ 7,109 $ 11,049 $ 14,758 $ 16,910 $ 32,354 Total assets.............................. 40,502 44,031 50,896 110,820 130,326 109,150 156,557 Total debt................................ 30,681 30,611 38,140 77,467 91,912 82,723 117,798 Redeemable warrants (f)................... 1,683 2,483 2,600 3,055 3,665 3,055 4,088 Total shareholders' equity................ 2,746 2,719 2,597 5,393 6,694 8,775 4,822
17
SIX MONTHS ENDED FISCAL YEAR ENDED AUGUST 31, ---------------------- ---------------------------------------------------------- FEB 28 FEB 29 1991 1992 1993 1994(A) 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) CASH FLOW DATA: Net cash provided by (used in) operating activities............................... $ 4,666 $ 7,699 $ 6,768 $ 9,351 $ 8,422 $ (1,759) $ 8,559 Net cash used in investing activities..... (4,931) (8,947) (9,119) (38,418) (24,648) (4,505) (16,010) Net cash provided by financing activities............................... 934 229 3,538 30,099 14,785 4,559 21,214 OPERATING AND OTHER DATA: Closure unit volume (in millions)......... 3,376 3,763 3,980 4,893 8,476 4,008 4,549 Closure unit volume growth (g)............ 8.9% 1.5% 5.8% 22.9% 73.2% 10.5% 13.5% EBITDA (h)................................ $ 11,180 $ 11,085 $ 12,883 $ 14,728 $ 23,588 $ 11,395 $ 14,330 Depreciation and amortization (i)......... 5,536 5,920 6,845 8,357 12,789 5,824 8,072 Capital expenditures...................... 4,204 8,089 9,564 6,159 11,302 4,703 16,372 Ratio of earnings to fixed charges (j).... 1.4x 1.4x 1.3x 1.2x 1.2x 1.2x --
- ------------------------------ (a) Includes ten months of operations before the Nepco acquisition on June 30, 1994 and two months of operations after the acquisition. Nepco is now a division of Portola. (b) Includes amortization of patents, goodwill and covenants not to compete. (c) Other expenses include financing costs and other expenses, net. (d) The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" in the fiscal year ended August 31, 1994. The cumulative effect on prior years is shown in such period. (e) Extraordinary item refers to extinguishment of certain debt, net of income tax benefit. (f) The redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company's Common Stock. If the Company does not complete an initial public offering of its Common Stock by June 30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the holders may require the Company to repurchase the warrants at the higher of current market value or an amount computed under the warrants. (g) These results reflect closure unit volume growth of the Company including Nepco after June 30, 1994. On a pro forma combined basis, the closure unit volume growth for Portola and Nepco was 11.6% for the fiscal year ended August 31, 1994. (h) EBITDA represents, for any relevant period, income (loss) before income taxes, extraordinary item, cumulative effect of change in accounting principle, depreciation of property, plant and equipment, interest expense, net, amortization of intangible assets and non-recurring legal expenses associated with the Company's litigation with Scholle Corporation through October 2, 1995. See "Business -- Litigation" in this Supplement to the Prospectus. The non-recurring legal expenses associated with the Scholle Corporation litigation for the fiscal years ended August 31, 1993, 1994 and 1995 were $275,000, $277,000 and $882,000, respectively; for the six months ended February 28, 1995 and February 29, 1996, they were $679,000 and $7,000, respectively. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, net income, cash flow or other measure of performance in accordance with generally accepted accounting principles. EBITDA data is included because the Company understands that such information is used by certain investors as one measure of an issuer's historical ability to service debt and because certain restrictive covenants in the Indenture will be based on a term very similar to the Company's EBITDA. (i) Includes amortization of debt financing costs. (j) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" represents income before provision for income taxes and fixed charges. "Fixed charges" consist of interest expense, amortization of debt financing costs and the portion of lease expense which management believes is representative of the interest component of lease expense. The ratio of earnings to fixed charges for the six months ended February 29, 1996 resulted in a deficiency of $1.6 million. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the section of the Prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is superseded in its entirety to read as follows: RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages of the Company's sales represented by certain income and expense items in its statement of operations.
SIX MONTHS ENDED ---------------------------- FEBRUARY 28, FEBRUARY 29, 1995 1996 ------------- ------------- Sales............................................................. 100.0% 100.0% Cost of sales..................................................... 74.7 75.6 ----- ----- Gross profit.................................................. 25.3 24.4 Selling, general and administrative............................... 12.6 11.1 Research and development.......................................... 0.9 1.4 Amortization of intangibles....................................... 2.8 3.0 ----- ----- Income from operations........................................ 9.0 8.9 Other (income) expense, net....................................... (0.3) 0.1 Interest expense, net............................................. 7.1 7.7 Amortization of debt financing costs.............................. 0.5 0.4 ----- ----- Income before income taxes.................................... 1.7 0.7 Income taxes...................................................... 1.3 1.0 ----- ----- Income (loss) before extraordinary item....................... 0.4 (0.3) Extraordinary item, net........................................... 0.0 1.7 ----- ----- Net income (loss)................................................. 0.4% (2.0)% ----- ----- ----- -----
SIX MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO SIX MONTHS ENDED FEBRUARY 28, 1995 Sales increased $18.3 million, or 32.9%, from $55.6 million for the six months ended February 28, 1995 to $73.9 million for the six months ended February 29, 1996. Of the increase, $10.2 million was attributable to sales from domestic closure operations, $2.1 million was attributable to an increase in equipment sales, primarily equipment to attach fitments to gabletop paperboard containers, and $6.0 million was due to sales from operations in the United Kingdom and Canada that were acquired since the second quarter of last year. The $10.2 million increase in sales from domestic closure operations is an increase of 20% from the prior year, and resulted from strong late summer sales, increased demand in core product lines, and increased export sales. Gross profit increased $4.0 million or 28.2%, to $18.0 million for the six months ended February 29, 1996, as compared to $14.0 million for the six months ended February 28, 1995. Gross profit as a percentage of sales decreased from 25.3% for the six months ended February 28, 1995 to 24.4% for the six months ended February 29, 1996. The absolute increase in gross profit was due to increased sales levels over the prior year. The margin decrease was due to the mix of sales, with higher sales of relatively low margin equipment and sales from the recently acquired Canadian and UK operations, each of which have had relatively low margins as well. Margins in the domestic closure business were up slightly for the first half of fiscal 1996 as compared with the same period of the prior year. Selling, general and administrative expense increased $1.2 million or 18.0%, to $8.2 million for the six months ended February 29, 1996, as compared to $7.0 million for the six months ended February 28, 1995, and decreased as a percentage of sales from 12.6% for the six months ended February 28, 1995 to 11.1% for the six months ended February 29, 1996. Selling expenses increased 19 $1.4 million due primarily to the higher sales levels, partially offset by a $0.2 million decrease in general and administrative expenses due primarily to reduced legal expenses as compared to the prior year. Research and development expense increased $486,000, or 93.2%, to $1.0 million for the six months ended February 29, 1996, as compared to $521,000 for the six months ended February 28, 1995, and increased as a percentage of sales from 0.9% in the six months ended February 28, 1995 to 1.4% in the six months ended February 29, 1996. The absolute increase in research and development expense was due primarily to increased staffing to address expanded new product development opportunities. Amortization of intangibles (consisting of amortization of patents, goodwill and covenants not to compete) increased $629,000, or 40.2%, to $2.2 million for the six months ended February 29, 1996, as compared to $1.6 for the six months ended February 28, 1995. The increase was primarily due to the amortization of goodwill and covenants not to compete resulting from the acquisition of Portola Packaging Canada Ltd. ("Portola Canada") in June 1995. Income from operations increased $1.6 million, or 31.9%, to $6.6 million for the six months ended February 29, 1996, as compared to $5.0 million for the six months ended February 28, 1995, and decreased as a percentage of sales from 9.0% for the six months ended February 28, 1995 to 8.9% for the six months ended February 29, 1996. These changes were due to the factors summarized above. Other (income) expense, net declined from income of $178,000 for the six months ended February 28, 1995 to expense of $62,000 for the six months ended February 29, 1996. Amortization of debt financing costs decreased $8,000 to $261,000 for the six months ended February 29, 1996, as compared to $269,000 for the six months ended February 28, 1995. Interest expense, net increased $1.8 million to $5.7 million for the six months ended February 29, 1996, as compared to $3.9 million for the six months ended February 28, 1995. Of the increase, $0.5 million was incurred by Portola Canada as a result of acquisition financing and working capital loans to finance operations, $1.9 million resulted from replacement of prior debt with the issuance on October 2, 1995 of $110 million of the Notes, with the increase partially offset by increased interest income of $0.6 million. Income taxes increased $25,000 to $755,000 for the six months ended February 29, 1996, as compared to $730,000 for the six months ended February 28, 1995. Income before extraordinary item decreased $431,000 to a loss of $200,000 for the six months ended February 29, 1996, as compared to income of $231,000 for the six months ended February 28, 1995. Net income decreased $1.7 million to a loss of $1.5 million for the six months ended February 29, 1996, as compared to income of $231,000 for the six months ended February 28, 1995. An extraordinary charge of $1.3 million net of taxes was recorded for the six months ended February 29, 1996, as loan fees and other costs were expensed in connection with an early extinguishment of debt resulting from the $110 million senior note issue. 20 The following table sets forth, for the periods indicated, the percentages of the Company's sales represented by certain income and expense items in its statement of operations.
FISCAL YEAR ENDED AUGUST 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Sales............................................................................ 100.0% 100.0% 100.0% Cost of sales.................................................................... 73.2 73.5 73.8 ----- ----- ----- Gross profit................................................................... 26.8 26.5 26.2 Selling, general and administrative.............................................. 12.4 12.5 13.4 Research and development......................................................... 1.4 1.1 1.3 Amortization of intangibles...................................................... 2.4 2.9 3.0 ----- ----- ----- Income from operations......................................................... 10.6 10.0 8.5 Other (income) expense, net...................................................... (0.1) 0.7 0.2 Interest expense, net............................................................ 5.2 5.6 6.8 Amortization of debt financing costs............................................. 0.8 0.6 0.4 ----- ----- ----- Income before income taxes..................................................... 4.7 3.1 1.1 Income taxes..................................................................... 2.6 1.6 1.0 ----- ----- ----- Income before extraordinary item and cumulative effect of accounting change.... 2.1 1.5 0.1 Extraordinary item, net.......................................................... 1.6 1.1 0.0 Cumulative effect of accounting change......................................... 0.0 0.1 0.0 ----- ----- ----- Net income....................................................................... 0.5% 0.3% 0.1% ----- ----- ----- ----- ----- -----
FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994 Sales increased $54.4 million, or 77.3%, from $70.3 million for fiscal 1994 to $124.6 million for fiscal 1995. Of the increase, $41.1 million was attributable to sales from Northern Engineering & Plastics Corp. ("Nepco") operations acquired by the Company on June 30, 1994. Of the remainder, $5.5 million was attributable to an increase in equipment sales, primarily due to international sales of PortaPlants and equipment to attach fitments to gabletop paperboard containers, $3.9 million resulted from closure price increases primarily driven by higher resin costs and $2.5 million was due to increased unit sales of 5-gallon and widemouth closures. Gross profit increased $14.1 million or 75.6%, to $32.7 million for fiscal 1995, as compared to $18.6 million for fiscal 1994. Gross profit as a percentage of sales decreased slightly from 26.5% for fiscal 1994 to 26.2% for fiscal 1995. The absolute increase in gross profit was primarily due to the Nepco acquisition and, to a lesser extent, to increased sales in other product lines. The margin decline was due to increased sales of low-margin fitment attachment equipment and to increases in resin costs that, although offset by price increases in approximately the same amounts, had the effect of decreasing gross profit margins. Selling, general and administrative expense increased $7.8 million or 88.7%, to $16.6 million for fiscal 1995, as compared to $8.8 million for fiscal 1994, and increased as a percentage of sales from 12.6% for fiscal 1994 to 13.4% for fiscal 1995. Of the absolute increase, approximately $3.7 million was due to a full year of selling, general and administrative expenses at Nepco in fiscal 1995, approximately $2.7 million represented increased general and administrative expenses due primarily to the increased size of the corporation and resulting infrastructure increases, $835,000 represented increased commissions due to higher sales revenues and $576,000 was due to increased legal expenses primarily associated with the Scholle patent infringement lawsuit. Research and development expense increased $918,000, or 120.2%, to $1.7 million for fiscal 1995, as compared to $764,000 for fiscal 1994, and increased as a percentage of sales from 1.1% in fiscal 1994 21 to 1.3% in fiscal 1995. Of the absolute increase in research and development expense, $525,000 was due primarily to increased staffing and the balance was the result of increased expenditures for new product prototypes and patent expenses. Amortization of intangibles (consisting of amortization of patents, goodwill and covenants not to compete) increased $1.7 million, or 83.9%, to $3.7 million for fiscal 1995, as compared to $2.0 million for fiscal 1994. Of the increase, $938,000 was due to goodwill amortization resulting from the Nepco acquisition and $729,000 resulted from the amortization of the covenants not to compete which relate to the acquisition of Nepco. Income from operations increased $3.6 million, or 51.7%, to $10.6 million for fiscal 1995, as compared to $7.0 million for fiscal 1994, but decreased as a percentage of sales from 10.0% for fiscal 1994 to 8.5% for fiscal 1995. These changes were due to the factors summarized above. Other expense, net declined $218,000 to $259,000 for fiscal 1995, as compared to $477,000 for fiscal 1994. Interest expense, net increased $4.6 million to $8.5 million for fiscal 1995, as compared to $3.9 million for fiscal 1994, primarily as a result of increased borrowings to fund the Nepco acquisition and higher working capital requirements associated with increased sales levels. Income taxes increased $199,000 to $1.3 million for fiscal 1995, as compared to $1.1 million for fiscal 1994. Amortization of debt financing costs increased $14,000 to $447,000 for fiscal 1995, as compared to $433,000 for fiscal 1994. Income before extraordinary item and cumulative effect of change in accounting principle decreased $960,000 to $140,000 for fiscal 1995, as compared to $1.1 million for fiscal 1994. Net income decreased $85,000 to $140,000 for fiscal 1995, as compared to $225,000 for fiscal 1994. An extraordinary charge of $790,000 net of taxes was recorded for fiscal 1994, as loan fees and other costs were expensed in connection with an early extinguishment of debt resulting from the Nepco acquisition. During fiscal 1994, the Company adopted SFAS 109, which resulted in a cumulative charge against earnings of $85,000. FISCAL YEAR ENDED AUGUST 31, 1994 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1993 Sales increased $12.0 million, or 20.6%, to $70.3 million for fiscal 1994, as compared to $58.3 million for fiscal 1993. Of the increase, $7.3 million was attributable to the Nepco acquisition on June 30, 1994 and represents Nepco's sales from closing to the end of the fiscal year. Of the $4.7 million remainder, $1.9 million was attributable to an increase in equipment sales, primarily due to international sales of PortaPlants and equipment to attach fitments to gable-top paperboard containers, $1.7 million was due to increased sales of five gallon closures and $693,000 resulted from increased sales of small closures, with a shift in product mix from the snap cap to the new snap-screw cap. Gross profit increased $3.0 million, or 19.3%, to $18.6 million for fiscal 1994, as compared to $15.6 million for fiscal 1993. Gross profit as a percentage of sales decreased from 26.8% for fiscal 1993 to 26.5% for fiscal 1994. The absolute increase in gross profit was primarily due to the increase in sales volume. The modest decline in gross margins was primarily due to increased depreciation and rent expenses principally associated with opening the new Batavia, Illinois plant at the beginning of fiscal 1994. Selling, general and administrative expense increased $1.6 million, or 22.4%, to $8.8 million for fiscal 1994, as compared to $7.2 million for fiscal 1993, and increased as a percentage of sales from 12.4% in fiscal 1993 to 12.5% in fiscal 1994. While selling expenses increased $550,000, they declined from 7.8% of sales in fiscal 1993 to 7.3% in fiscal 1994 primarily because promotional equipment expenses were reduced by $400,000 in fiscal 1994. General and administrative expenses increased $1.2 million, with the increases primarily due to the inclusion of Nepco for the last two months of fiscal 1994, bonus and profit-sharing accruals and audit fee accruals. 22 Research and development expense decreased $56,000, or 6.8%, to $764,000 for fiscal 1994 as compared to $820,000 for fiscal 1993 and decreased as a percentage of sales from 1.4% in fiscal 1993 to 1.1% in fiscal 1994. The decreases were primarily attributable to the allocation of research and development personnel to operations for work on current product enhancement projects. Amortization of intangibles increased $625,000, or 44.6%, to $2.0 million in fiscal 1994 from $1.4 million in fiscal 1993. Of the increase, $342,000 was due to the write-up of certain patent assets in fiscal 1994 in connection with the adoption of SFAS 109, $121,000 was due to amortization of non-compete payments and $162,000 was due to goodwill amortization in fiscal 1994 resulting from the Nepco acquisition and related financing activities. There was no amortization of goodwill in fiscal 1993. Income from operations increased $824,000, or 13.3%, to $7.0 million for fiscal 1994, as compared to $6.2 million for fiscal 1993, and declined slightly from 10.6% of sales in 1993 to 10.0% of sales in fiscal 1994. These changes were due to the factors summarized above. Other (income) expense, net increased $539,000 to expense of $477,000 in fiscal 1994 as compared to income of $62,000 in fiscal 1993, primarily due to fiscal 1994 write-offs totaling $625,000 as a result of financing activities that were postponed. Interest expense, net increased $855,000, or 28.1%, to $3.9 million in fiscal 1994 from $3.0 million in fiscal 1993, due to the Company incurring $39.1 million of additional debt primarily to fund the Nepco acquisition. Income taxes decreased $426,000 to $1.1 million in fiscal 1994 as compared to $1.5 million in fiscal 1993. Amortization of debt financing costs decreased $46,000 to $433,000 in fiscal 1994, as compared to $479,000 in fiscal 1993. Income before extraordinary item and cumulative effect of change in accounting principle decreased $98,000 to $1.1 million in fiscal 1994 as compared to $1.2 million in fiscal 1993. Net income decreased $84,000 to $225,000 in fiscal 1994 as compared to $309,000 in fiscal 1993. In connection with the early extinguishment of debt, loan fees and other costs were expensed, resulting in an extraordinary charge for fiscal 1994 of $790,000 net of taxes. In October 1992, the Company refinanced its debt to provide additional capacity for growth, resulting in an extraordinary charge for fiscal 1993 of $889,000 net of taxes. During fiscal 1994, the Company adopted SFAS 109, which resulted in a cumulative charge against earnings of $85,000. LIQUIDITY AND CAPITAL RESOURCES The Company has relied primarily upon cash from operations, supplemented as necessary from time to time by borrowings from financial institutions and sales of Common Stock, to finance its operations, repay long-term indebtedness and fund capital expenditures and acquisitions. At February 29, 1996, primarily as a result of the Note offering in October 1995, the Company had cash, cash equivalents and short-term investments of $14.5 million, an increase of $12.7 million from August 31, 1995. Cash provided by operations totaled $8.6 million for the six months ended February 29, 1996, a $10.4 million increase from the $1.8 million used by operations for the six months ended February 28, 1995. Accounts receivable and inventories provided funds of $0.4 million in the six months ended February 29, 1996, as opposed to using funds of $5.4 million in the same period of the prior year. Additions to property were $16.4 million for the six months ended February 29, 1996, as compared to $4.7 million for the six months ended February 28, 1995. The increase included the acquisition, for $7.2 million, of the Company's headquarters and manufacturing facilities in San Jose, California, on February 9, 1996. The balance of the increase in capital expenditures is primarily for increased production capacity for fitments, push-pull and snap-screw closures, replacement molds and a reconfiguration of the New Castle, Pennsylvania plant layout for increased efficiency. Capital expenditures, 23 excluding the San Jose plant purchase, are currently expected to be approximately $18.0 million for fiscal 1996 and should be financed through cash from operations. This also excludes potential expansion activity in Canada and the United Kingdom. On October 2, 1995, the Company completed the $110 million offering of Notes that mature on October 1, 2005 and bear interest at the rate of 10.75% per annum. Interest is payable semi-annually on April 1 and October 1 of each year, commencing on April 1, 1996. The net proceeds of the Note offering were approximately $106 million, of which $83 million was used to retire the Company's debt then outstanding under its senior term loans, revolving facility and senior subordinated notes. Subsequent to the closing of the Note offering, $7.2 million was used to purchase the Company's San Jose facilities, $11 million was used to purchase machinery and equipment, $3 million was used to make a loan to the Company's 50% joint venture in Mexico, and $2 million was used for working capital needs. The Company has been the defendant in litigation with Scholle Corporation ("Scholle") related to alleged patent infringement on five-gallon non-spill caps (see Note 9 of the financial statements included as part of this report). On January 2, 1996, the court denied further motions and entered the jury's verdict making the Company liable for damages of $0.01 per closure unit sold. The Company is likely to have to pay $0.01 per closure unit in damages, totalling approximately $1.4 million on sales through April 30, 1996, as well as on sales occurring thereafter. These amounts have been and will continue to be accrued in the Company's financial statements in the periods in which sales occurred or continue to occur. At February 29, 1996, the Company had $14.5 million in cash and cash equivalents as well as borrowing capacity under the revolving credit facility which was unused as of the date of this Supplement to the Prospectus. Management believes that these resources, together with anticipated cash flow from operations, will be adequate to fund the Company's operations, debt service requirements and capital expenditures into fiscal 1997. INFLATION Most of the Company's closures are priced based in part on the cost of the plastic resins from which they are produced. Historically, the Company has been able to pass on increases in resin prices directly to its customers on a timely basis. In recent years, the Company has benefited from relatively stable or declining prices for raw materials other than plastic resins. In the event significant inflationary trends were to resume, management believes that the Company would generally be able to offset the effects thereof through a combination of continuing improvements in operating efficiencies and price increases. SEASONALITY The Company's sales and earnings reflect a seasonal pattern as a result of greater sales volumes during the summer months. For example, in fiscal 1995, excluding the acquisition of Portola Canada which occurred in June 1995, 45% of sales occurred in the first half of the year (September through February) while 55% of sales were generated in the second half (March through August). The effect of seasonality on income from operations is usually somewhat more pronounced, although in fiscal 1995 49% of income from operations was generated in the first half of the year and 51% was generated in the second half. INCOME TAXES Effective September 1, 1993, the Company adopted SFAS 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Prior years' financial statements were not restated to apply the provisions of SFAS No. 109; however, prior year business combinations were restated as of September 1, 1993 under SFAS No. 109. Under this method, deferred tax assets and 24 liabilities are determined based on the difference between the financial statement and tax bases of such assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Prior to September 1, 1993, the provision for income taxes was based on income and expense included in the accompanying consolidated statements of operations. Differences between taxes so computed and taxes payable under applicable statutes and regulations were classified as deferred taxes arising from timing differences. Income tax expense does not bear a normal relationship to income before income taxes primarily due to nondeductible goodwill arising from the Nepco acquisition. RECENT ACCOUNTING PRONOUNCEMENTS During March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which requires the Company to review for impairment long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement requires impairment losses to be recognized for assets that do not have realizable carrying values. SFAS 121 will be effective for the Company's fiscal year 1997. The Company is currently studying the implications of the statement to determine its impact on the Company's financial condition and results of operations. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans. The Company is currently following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees" while it studies the implications of SFAS No. 123 and evaluates the effect, if any, on the financial condition and results of operations of the Company. SFAS No. 123 will be effective for the Company's fiscal year 1997. EXPERTS The information included in the section of the Prospectus entitled "Experts" is superseded in its entirety as set forth below. The consolidated balance sheets as of August 31, 1994 and 1995, and the consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1995, of the Company included in this Supplement to the Prospectus have been included herein in reliance on the report, which includes an explanatory paragraph regarding Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and restated fiscal 1994 earnings (loss) per share in accordance with EITF 88-9, of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 25 INDEX TO FINANCIAL STATEMENTS The following financial statements supersede in their entirety the financial statements included in the attached Prospectus. Portola Packaging, Inc. and Subsidiaries
PAGE ----- Report of Independent Accountants........................................................................ F-2 Consolidated Balance Sheets.............................................................................. F-3 Consolidated Statements of Operations.................................................................... F-5 Consolidated Statements of Cash Flows.................................................................... F-6 Consolidated Statements of Shareholders' Equity.......................................................... F-7 Notes to Consolidated Financial Statements............................................................... F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Portola Packaging, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Portola Packaging, Inc. and Subsidiaries as of August 31, 1994 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Portola Packaging, Inc. and Subsidiaries as of August 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, effective September 1, 1993, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" and restated fiscal 1994 earnings (loss) per share in accordance with EITF 88-9. COOPERS & LYBRAND L.L.P. San Jose, California November 1, 1995 F-2 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS
AUGUST 31, ------------------------ 1994 1995 ----------- ----------- FEBRUARY 29, 1996 ------------ (UNAUDITED) Current Assets: Cash and cash equivalents............................................... $ 2,219 $ 763 $ 14,526 Short term investments.................................................. 1,000 Accounts receivable, net of allowance for doubtful accounts of $389, $813 and $660, respectively............................................ 15,626 20,323 20,267 Inventories............................................................. 8,441 9,833 10,193 Other current assets.................................................... 1,736 2,300 3,117 Deferred income taxes................................................... 738 2,248 2,068 ----------- ----------- ------------ Total current assets................................................ 28,760 36,467 50,171 Investments............................................................... 1,000 Notes receivable.......................................................... 281 518 284 Property, plant and equipment, net........................................ 47,147 53,132 64,059 Goodwill, net of accumulated amortization of $162, $1,314 and $2,148, respectively............................................................. 16,303 21,580 22,050 Patents, net of accumulated amortization of $8,922, $10,413 and $11,157, respectively............................................................. 9,014 7,607 6,863 Covenants not to compete, net of accumulated amortization of $313, $1,393 and $1,666, respectively................................................. 3,631 5,295 5,022 Debt financing costs, net of accumulated amortization of $79, $526 and $261, respectively....................................................... 2,392 1,937 3,286 Other assets.............................................................. 2,292 3,790 4,822 ----------- ----------- ------------ Total assets........................................................ $ 110,820 $ 130,326 $ 156,557 ----------- ----------- ------------ ----------- ----------- ------------
(CONTINUED ON NEXT PAGE) The accompanying notes are an integral part of these consolidated financial statements. F-3 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
AUGUST 31, ------------------------ 1994 1995 ----------- ----------- FEBRUARY 29, 1996 ------------ (UNAUDITED) Current liabilities: Current portion of long term debt....................................... $ 3,179 $ 5,668 $ 819 Accounts payable........................................................ 7,511 7,796 5,504 Accrued liabilities..................................................... 6,312 7,449 6,521 Accrued interest........................................................ 709 796 4,973 ----------- ----------- ------------ Total current liabilities........................................... 17,711 21,709 17,817 Long-term debt, less current potion....................................... 74,288 86,244 116,979 Other long term obligations............................................... 3,126 3,911 4,905 Deferred income taxes..................................................... 7,247 8,103 7,946 ----------- ----------- ------------ Total liabilities................................................... 102,372 119,967 147,647 ----------- ----------- ------------ Commitments and contingencies (Note 9).................................... Redeemable warrants to purchase Class A common stock...................... 3,055 3,665 4,088 ----------- ----------- ------------ Common stock and other shareholders' equity: Class A convertible common stock of $.001 par value: Authorized: 2,503 shares;............................................. Issued and outstanding: 2,135 at February 29, 1996; none at August 31, 1995 and 1994........................................................ 2 Class B, Series 1, common stock of $.001 par value: Authorized: 17,715 shares;............................................ Issued and outstanding: 8,679 shares in 1994, 9,225 shares in 1995 and 8,492 shares in 1996................................................. 8 9 9 Class B, Series 2, convertible common stock of $.001 par value: Authorized: 2,571 shares;............................................. Issued and outstanding: 2,571 shares in 1994 and 1995, and 1,171 shares in 1996....................................................... 3 3 1 Additional paid-in capital................................................ 7,351 9,205 9,213 Notes receivable from shareholders........................................ (286) (362) (362) Cumulative foreign currency translation adjustments....................... (8) Accumulated deficit....................................................... (1,683) (2,153) (4,041) ----------- ----------- ------------ Total common stock and other shareholders' equity................... 5,393 6,694 4,822 ----------- ----------- ------------ Total liabilities, redeemable warrants, common stock and other shareholders' equity............................................... $ 110,820 $ 130,326 $ 156,557 ----------- ----------- ------------ ----------- ----------- ------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, -------------------------- ------------------------------- FEBRUARY 28, FEBRUARY 29, 1993 1994 1995 1995 1996 --------- --------- --------- ------------ ------------ (UNAUDITED) Sales.................................................. $ 58,286 $ 70,284 $ 124,650 $ 55,585 $ 73,877 Cost of sales.......................................... 42,679 51,670 91,972 41,530 55,857 --------- --------- --------- ------------ ------------ Gross profit....................................... 15,607 18,614 32,678 14,055 18,020 --------- --------- --------- ------------ ------------ Selling, general and administrative.................... 7,207 8,821 16,649 6,986 8,245 Research and development............................... 820 764 1,682 521 1,007 Amortization of intangibles............................ 1,400 2,025 3,724 1,565 2,194 --------- --------- --------- ------------ ------------ 9,427 11,610 22,055 9,072 11,446 --------- --------- --------- ------------ ------------ Income from operations............................. 6,180 7,004 10,623 4,983 6,574 --------- --------- --------- ------------ ------------ Other (income) expense: Interest income...................................... (84) (97) (175) (72) (684) Interest expense..................................... 3,128 3,996 8,658 4,003 6,380 Amortization of financing costs...................... 479 433 447 269 261 Financing costs...................................... 625 Other (income) expense, net.......................... (62) (148) 259 (178) 62 --------- --------- --------- ------------ ------------ 3,461 4,809 9,189 4,022 6,019 --------- --------- --------- ------------ ------------ Income before extraordinary item, cumulative effect of change in accounting principle and income taxes............................................. 2,719 2,195 1,434 961 555 Income taxes........................................... 1,521 1,095 1,294 730 755 --------- --------- --------- ------------ ------------ Income (loss) before extraordinary item and cumulative effect of change in accounting principle......................................... 1,198 1,100 140 231 (200) Extraordinary item -- loss on extinguishment of debt, net income tax benefit of $592, $539 and $844 (Note 7).................................................... 889 790 1,265 Cumulative effect of change in accounting principle (Note 13)............................................. 85 --------- --------- --------- ------------ ------------ Net income (loss)...................................... $ 309 $ 225 $ 140 $ 231 $ (1,465) --------- --------- --------- ------------ ------------ --------- --------- --------- ------------ ------------ Net income (loss) for common shareholders.............. $ 309 $ (230) $ (470) $ (48) $ (1,888) --------- --------- --------- ------------ ------------ --------- --------- --------- ------------ ------------ Earnings (loss) per common share: Income (loss) before extraordinary item and cumulative effect of change in accounting principle........................................... $ 0.10 $ 0.06 $ (0.04) $ 0.00 $ (0.05) Cumulative effect of change in accounting principle........................................... $ 0.01 Net income (loss).................................... $ 0.02 $ (0.02) $ (0.04) $ 0.00 $ (0.16) Number of shares used in computing per share amount.... 12,554 11,087 11,393 11,255 11,585
The accompanying notes are an integral part of these consolidated financial statements. F-5 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, --------------------------- ------------------------------- FEBRUARY 28, FEBRUARY 29, 1993 1994 1995 1995 1996 --------- --------- --------- ------------- ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss).................................... $ 309 $ 225 $ 140 $ 231 $ (1,465) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................... 6,845 8,357 12,789 5,824 8,072 Extraordinary loss on extinguishment of debt....... 1,481 1,329 2,109 Deferred income taxes.............................. 369 (320) (707) (605) 23 Loss on property and equipment dispositions........ 8 147 Provision for doubtful accounts.................... 39 16 420 75 (154) Tax benefit of option exercise..................... 700 Changes in working capital: Accounts receivable.............................. (1,143) (1,526) (3,953) (2,969) 755 Inventories...................................... (685) (908) (784) (2,403) (314) Other current assets............................. (331) 600 (269) 768 (726) Accounts payable................................. (1,165) (712) (585) (2,675) (2,876) Accrued liabilities.............................. 309 1,987 1,137 (65) (1,042) Accrued interest................................. 32 303 87 60 4,177 --------- --------- --------- ------------- ------------ Net cash provided by operating activities...... 6,768 9,351 8,422 (1,759) 8,559 --------- --------- --------- ------------- ------------ Cash flows from investing activities: Additions to property, plant and equipment........... (9,564) (6,159) (11,302) (4,703) (16,372) Proceeds from sale of property, plant and equipment........................................... 49 47 162 Payments for acquisition of Nepco net of cash acquired of $173.................................... (30,774) Payments for Canadian acquisition net of cash acquired of $232.................................... (11,506) Payments for UK acquisition, net of cash acquired of $18................................................. (1,445) Issuance of notes receivable......................... (75) (237) Proceeds from short term investments................. 1,000 Repayment of notes receivable........................ 13 31 (Increase) decrease in other assets.................. 458 (1,563) (1,765) 198 807 --------- --------- --------- ------------- ------------ Net cash used in investing activities.......... (9,119) (38,418) (24,648) (4,505) (16,010) --------- --------- --------- ------------- ------------ Cash flows from financing activities Decrease in bank overdraft........................... (349) Borrowings under debt arrangements................... 46,787 54,214 29,284 10,168 4,146 Repayments of debt arrangements...................... (39,771) (24,619) (15,208) (4,816) (88,260) Payment of loan fees................................. (2,410) (2,472) (297) (4,019) Prepayment penalty................................... (157) Issuance of warrants................................. 210 Sales of common stock................................ 843 3,025 1,855 Proceeds from public debt offering................... 110,000 Repayment of notes receivable from shareholders...... 1 15 Increase in other receivable from shareholders....... (91) Repurchase of common stock........................... (1,722) Payments on covenants not to compete................. (50) (50) (1,070) (496) (496) --------- --------- --------- ------------- ------------ Net cash provided by financing activities...... 3,538 30,099 14,785 4,559 21,214 --------- --------- --------- ------------- ------------ Effect of exchange rate changes on cash................ (15) Increase (decrease) in cash and cash equivalents................................. 1,187 1,032 (1,456) (1,705) 13,763 --------- --------- --------- ------------- ------------ Cash and cash equivalents at beginning of period....... 1,187 2,219 2,219 763 --------- --------- --------- ------------- ------------ Cash and cash equivalents at end of period............. $ 1,187 $ 2,219 $ 763 $ 514 $ 14,526 --------- --------- --------- ------------- ------------ --------- --------- --------- ------------- ------------
The accompanying notes are an integral part of these consolidated financial statements. F-6 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (INFORMATION FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996 IS UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK --------------------------------------------------------------- CLASS B ------------------------------------- CLASS A SERIES 1 SERIES 2 ------------------------ ------------------------ ----------- SHARES AMOUNT SHARES AMOUNT SHARES ----------- ----------- ----------- ----------- ----------- Balances, August 31, 1992.............................. 7,183 $ 720 2,571 Issuance of Class B, Series 1 common stock at $1.00 per share........................................... 11 11 Exercise of stock options at $0.61 per share......... 1,363 832 Repurchase of Class B, Series 1, common stock at $2.50 per share..................................... (688) (1,721) Tax benefit of stock option exercise................. 700 Payment of note receivable from shareholders......... Increase in value of stock purchase warrants......... Net income........................................... ----- ----------- ----------- Balances, August 31, 1993.............................. 7,869 542 2,571 Issuance of Class B common stock at $3.75 per share............................................... 800 3,000 Exercise of stock options at $2.50 per share......... 10 25 Reincorporation into a Delaware corporation.......... (3,559) Payment of note receivable from shareholders......... Increase in value of stock purchase warrants......... Net income........................................... ----- ----------- ----------- Balances, August 31, 1994.............................. 8,679 8 2,571 Exercise of stock options at $0.61, $1.00 and $4.00 per share........................................... 96 1 Increase in notes and other receivable from shareholders........................................ Issuance of Class B common stock at $4.00 per share, net of issuance costs of $23........................ 450 Increase in value of stock purchase warrants......... Foreign currency translation adjustment.............. Net income........................................... ----- ----------- ----------- Balances, August 31, 1995.............................. 9,225 9 2,571 Conversion of Class B shares to Class A.............. 2,135 $ 2 (735) (1,400) Exercise of stock options at $4.50 per share......... 2 Increase in value of stock purchase warrants......... Foreign currency translation adjustment.............. Net loss............................................. ----- --- ----- ----------- ----------- Balances, February 29, 1996............................ 2,135 $ 2 8,492 $ 9 1,171 ----- --- ----- ----------- ----------- ----- --- ----- ----------- ----------- CUMULATIVE FOREIGN ADDITIONAL NOTES AND OTHER CURRENCY PAID-IN RECEIVABLE FROM TRANSLATION ACCUMULATED AMOUNT CAPITAL SHAREHOLDERS ADJUSTMENTS DEFICIT ----------- ----------- --------------- --------------- ------------- Balances, August 31, 1992.............................. $ 3,795 $ (291) $ (1,755) Issuance of Class B, Series 1 common stock at $1.00 per share........................................... Exercise of stock options at $0.61 per share......... Repurchase of Class B, Series 1, common stock at $2.50 per share..................................... Tax benefit of stock option exercise................. Payment of note receivable from shareholders......... 4 Increase in value of stock purchase warrants......... (7) Net income........................................... 309 ----------- ------ ------------- Balances, August 31, 1993.............................. 3,795 (287) (1,453) Issuance of Class B common stock at $3.75 per share............................................... Exercise of stock options at $2.50 per share......... Reincorporation into a Delaware corporation.......... (3,792) $ 7,351 Payment of note receivable from shareholders......... 1 Increase in value of stock purchase warrants......... (455) Net income........................................... 225 ----------- ----------- ------ ------------- Balances, August 31, 1994.............................. 3 7,351 (286) (1,683) Exercise of stock options at $0.61, $1.00 and $4.00 per share........................................... 78 Increase in notes and other receivable from shareholders........................................ (76) Issuance of Class B common stock at $4.00 per share, net of issuance costs of $23........................ 1,776 Increase in value of stock purchase warrants......... (610) Foreign currency translation adjustment.............. $ (8) Net income........................................... 140 ----------- ----------- ------ --- ------------- Balances, August 31, 1995.............................. 3 $ 9,205 (362) (8) (2,153) Conversion of Class B shares to Class A.............. (2) Exercise of stock options at $4.50 per share......... 8 Increase in value of stock purchase warrants......... (423) Foreign currency translation adjustment.............. 8 Net loss............................................. (1,465) ----------- ----------- ------ --- ------------- Balances, February 29, 1996............................ $ 1 $ 9,213 $ (362) $ -- $ (4,041) ----------- ----------- ------ --- ------------- ----------- ----------- ------ --- ------------- TOTAL COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY ------------- Balances, August 31, 1992.............................. $ 2,469 Issuance of Class B, Series 1 common stock at $1.00 per share........................................... 11 Exercise of stock options at $0.61 per share......... 832 Repurchase of Class B, Series 1, common stock at $2.50 per share..................................... (1,721) Tax benefit of stock option exercise................. 700 Payment of note receivable from shareholders......... 4 Increase in value of stock purchase warrants......... (7) Net income........................................... 309 ------------- Balances, August 31, 1993.............................. 2,597 Issuance of Class B common stock at $3.75 per share............................................... 3,000 Exercise of stock options at $2.50 per share......... 25 Reincorporation into a Delaware corporation.......... -- Payment of note receivable from shareholders......... 1 Increase in value of stock purchase warrants......... (455) Net income........................................... 225 ------------- Balances, August 31, 1994.............................. 5,393 Exercise of stock options at $0.61, $1.00 and $4.00 per share........................................... 79 Increase in notes and other receivable from shareholders........................................ (76) Issuance of Class B common stock at $4.00 per share, net of issuance costs of $23........................ 1,776 Increase in value of stock purchase warrants......... (610) Foreign currency translation adjustment.............. (8) Net income........................................... 140 ------------- Balances, August 31, 1995.............................. 6,694 Conversion of Class B shares to Class A.............. -- Exercise of stock options at $4.50 per share......... 8 Increase in value of stock purchase warrants......... (423) Foreign currency translation adjustment.............. 8 Net loss............................................. (1,465) ------------- Balances, February 29, 1996............................ $ 4,822 ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) 1. ORGANIZATION: Portola Packaging, Inc. and Subsidiaries (the Company) operates in one industry segment. The Company designs, manufactures and markets proprietary tamper evident plastic closures for containers for the food and beverage industries and related capping and filling equipment used on bottling lines by the food and beverage industries. 2. ACQUISITIONS: On September 1, 1995, the Company completed the acquisition of the 50% interest it had not previously owned in Cap Snap (UK) Ltd, now known as Portola Packaging Ltd. ("Cap Snap (UK)") for a purchase price of approximately $1.5 million. Cap Snap (UK) is a British corporation engaged in manufacturing and distributing small closures in the United Kingdom. The transaction has been accounted for as a purchase and the results of operations subsequent to the acquisition date have been consolidated with the Company. Cap Snap (UK) is being operated as an "unrestricted subsidiary". Accordingly, amounts that may be invested by the Company in Cap Snap (UK) are subject to limitations pursuant to the terms of the Indenture pertaining to the senior notes issued in October 1995 (see Note 16). Consideration for the acquisition was allocated as follows:
(UNAUDITED) ----------- Total consideration paid................................................................... $ 1,463 Fair value of net assets acquired.......................................................... 159 ----------- Goodwill............................................................................... $ 1,304 ----------- -----------
Effective June 16, 1995, the Company completed the acquisition of Alberta Plastic Industries Ltd., B.C. Plastic Industries Ltd., the remaining 50% interest of the Company's joint venture, Canada Cap Snap Corporation, and certain production equipment of Allwest Industries Incorporated. The acquired companies and assets operate in Canada as Portola Packaging Canada Ltd. The Canadian acquisition has been accounted for as a purchase and the results of operations of Portola Packaging Canada Ltd. have been consolidated with those of the Company commencing June 16, 1995. The total purchase price, including cash consideration and a noncompete agreement, amounted to $13,572. Cash consideration paid by the Company was $11,738. In addition, the Company entered into a noncompete agreement under which an intangible asset totaling $2,560 was recorded at the present value of the payments (using a discount rate of 8.75%). A liability was recorded of $1,834, which represents the net present value of the payments less the initial payment made upon the closing of the Canadian acquisition. Consideration for the acquisition was allocated as follows: Total consideration paid................................................. $ 11,738 Fair value of net assets acquired........................................ 5,464 ----------- Goodwill............................................................. $ 6,274 ----------- -----------
F-8 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 2. ACQUISITIONS: (CONTINUED) Pro forma financial statements as if the Canadian acquisition had taken place at the beginning of each period presented is as follows:
PRO FORMA PRO FORMA 1994 1995 ----------- ----------- (UNAUDITED) Sales.......................................................................... $ 74,853 $ 132,165 Gross profit................................................................... 20,286 35,638 Operating income............................................................... 7,610 11,597 Net income (loss).............................................................. (214) 400 Net income (loss) per share.................................................... (0.06) (0.02)
Effective June 30, 1994, the Company acquired all of the outstanding stock of Northern Engineering & Plastics Corp. and Northern Engineering and Plastics Corp. -- West (collectively "Nepco"). Concurrent with the acquisition of Nepco, the Company also purchased, from parties related to the owners of Nepco, certain real property located in Sumter, South Carolina. Nepco designs, manufactures and markets tamper evident plastic closures in markets similar to those served by the Company. The real property acquired in Sumter, South Carolina is a location where Nepco maintains substantial manufacturing operations. The acquisition of Nepco has been accounted for as a purchase and the results of operations of Nepco have been consolidated with those of the Company commencing July 1, 1994. The total purchase price, including cash consideration, repayment of existing indebtedness and noncompete agreements, amounted to $43,650. Cash consideration paid by the Company for the acquisition was $30,947. In addition, the Company assumed, and subsequently repaid, Nepco indebtedness of $9,058, and entered into a noncompete agreement under which an intangible asset and a liability totaling $3,645 were recorded at the present value of the payments (using a discount rate of 11%). The Company financed its payments for the acquisition and Nepco indebtedness which aggregated $40,005, through a series of term senior and revolving notes as described in Note 7. The cash consideration paid by the Company comprised the following: Cash paid to the former shareholders of Nepco............................. $ 28,500 Cash paid for the purchase of real property............................... 1,872 Cash paid for certain closing costs....................................... 575 --------- $ 30,947 --------- ---------
Cash consideration for the acquisition was allocated as follows: Total consideration paid.................................................. $ 30,947 Fair value of net assets acquired......................................... 14,482 --------- Goodwill.............................................................. $ 16,465 --------- ---------
In connection with the acquisition, the Company entered into noncompete and bonus agreements with the former owners of Nepco. The noncompete and bonus agreements have a five-year term with annual payments of $800 and $200, respectively. F-9 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 2. ACQUISITIONS: (CONTINUED) Pro forma financial statements as if the acquisition of Nepco had taken place at the beginning of each period presented is as follows:
PRO FORMA PRO FORMA 1993 1994 ----------- ----------- (UNAUDITED) Sales.......................................................................... $ 89,143 $ 101,415 Gross profit................................................................... 23,230 22,246 Operating income............................................................... 4,517 5,175 Net income (loss).............................................................. (2,295) (2,908) Net income (loss) per share.................................................... (0.18) (0.30)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated. INTERIM FINANCIAL STATEMENTS: The interim financial statements included herein have been prepared by the Company without audit and in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation. Interim results are subject to significant seasonal variations and the results of operations for the six months period ended February 29, 1996 are not necessarily indicative of the results to be expected for the full year. REVENUE RECOGNITION: The Company recognizes revenue upon product shipment. CASH EQUIVALENTS: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. INVESTMENTS: Investments at August 31, 1995 consisted of a certificate of deposit whose cost approximates fair market value. Investments are generally considered to be available-for-sale and therefore are carried at fair market value. Unrealized holding gains and losses on such securities, when material, are reported net of related taxes as a separate component of common stock and other shareholders' equity. Realized gains and losses on sales of all such investments are reported in earnings and computed using the specific cost identification method. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost and depreciated on the straight-line basis over estimated useful lives, which range from three to thirty-five years. Leasehold improvements are amortized on a straight-line basis over their useful lives or the lease term, whichever is shorter F-10 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) (generally five to ten years). When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are included in the results of operations. JOINT VENTURES: The Company maintains joint venture and license arrangements in Mexico. This investment, which is included in other assets, is accounted for by the equity method. The Company's total investment and related income have not been significant and are not separately presented. INTANGIBLE ASSETS: Patents and covenants not-to-compete are valued at cost and are amortized on a straight-line basis over the lesser of their remaining useful or contractual lives (generally five to thirteen years). Goodwill recorded in connection with acquisitions of Nepco and of Portola Packaging Canada Ltd. (Note 2) is amortized on a straight-line basis over 15 and 25 years, respectively. DEBT FINANCING COSTS: Debt financing costs are amortized using the interest method over the term of the related loans. RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are charged to operations as incurred. INCOME TAXES: Effective September 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of such assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (See Note 13). Prior to September 1, 1993, the Company accounted for income taxes pursuant to Accounting Principles Board Opinion No. 11, "Income Taxes." Prior year financial statements have not been restated. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and trade receivables. The Company's cash and cash equivalents and investments are concentrated in three United States banks and one Canadian bank. At times, such deposits may be in excess of insured limits. Management believes that the financial institutions which hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments. F-11 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) The Company's products are principally sold to entities in the food and beverage industries in the United States and Canada. Ongoing credit evaluations of customer financial condition are performed and collateral is generally not required. The Company maintains reserves for potential credit losses which, on a historical basis, have not been significant. The Company has made an accrual of the estimated costs associated with its Scholle patent infringement litigation (Note 9), the final outcome of which is uncertain. The Company has significant intangible assets including goodwill, patents and covenants not to compete which are subject to periodic review by the Company. FOREIGN CURRENCY TRANSLATION: The Company's foreign subsidiaries use the local currency as their functional currency. Assets and liabilities are translated at year-end exchange rates. Items of income and expense are translated at average exchange rates for the relevant year. Translation gains and losses are not included in determining net income (loss) but are accumulated as a separate component of stockholders' equity (deficit). Net gains and losses arising from foreign currency transactions were not material in fiscal 1993, 1994 and 1995. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARES: Earnings (loss) per common share and common equivalent share are computed by dividing income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Except as discussed below, the number of common shares is increased by the number of shares issuable on the exercise of options and warrants when the market price of the common stock exceeds the exercise price of the options and warrants. This increase in the number of common shares is reduced by the number of common shares which are assumed to have been purchased with the proceeds from the exercise of the options and warrants; these purchases are assumed to have been made at the average price of the common stock during that part of the period when the market price of the common stock exceeds the exercise price of the options and warrants. Since the Company's warrants include a put provision, Emerging Issues Task Force (EITF) Consensus 88-9 requires computation of earnings (loss) per share using the lower of the amount computed assuming conversion, as described above, or the amount computed assuming exercise of the put option feature of the warrants. Earnings (loss) per share computed using the put option feature is the more dilutive of the calculations in fiscal 1994 and 1995, and results in a loss per share since the accretion of the warrants of $455 and $610 for fiscal 1994 and 1995, respectively, is deducted from earnings. Earnings (loss) per share for fiscal 1994, as previously reported, has been restated to use the more dilutive of the two calculations, which resulted in a decrease in earnings (loss) per share of $.04 from that originally reported. There was no impact on the previously reported earnings per share for 1993 or on the financial position, net income or cash flows as previously reported for any period presented. CARRYING VALUE OF LONG-LIVED ASSETS: The Company reduces the carrying value of long-lived assets to the extent to which future undiscounted operating cash flows are not sufficient to recover the carrying value of such assets over their remaining estimated useful lives. RECENT ACCOUNTING PRONOUNCEMENTS: During March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" F-12 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) (SFAS 121), which requires the Company to review for impairment long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement requires impairment losses to be recognized for assets that do not have realizable carrying values. SFAS 121 will be effective for the Company's fiscal year 1997. (The Company is currently studying the implications of the statement to determine its impact on the Company's financial condition and results of operations.) During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans. The Company is currently following the requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees" while it studies the implications of SFAS No. 123 and evaluates the effect, if any, on the financial condition and results of operations of the Company. SFAS No. 123 will be effective for the Company's fiscal year 1997. RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform with the current year financial statement presentation. These reclassifications had no effect on net income. 4. SUPPLEMENTAL CASH FLOW DISCLOSURES: The Company paid $74, $835 and $1,688 in income taxes during the years ended August 31, 1993, 1994 and 1995, respectively. The Company paid $3,257, $3,694 and $8,571 in interest during the years ended August 31, 1993, 1994 and 1995, respectively. During fiscal year 1993, the Company received 688 shares of its Class B common stock from an officer and director in settlement of stock options exercised and related federal and state withholding tax obligations. During fiscal year 1994, the Company reincorporated into a Delaware corporation, which resulted in a reclassification of $7,351 Class B common stock into additional paid-in capital. During fiscal year 1994, the Company acquired $8 of equipment under capital lease. During fiscal 1994, the Company adopted SFAS No. 109 under which fixed assets and patents were grossed up $1,322 and $1,906, respectively, consistent with the gross-up of the deferred tax liability. During fiscal 1994 and 1995, the Company wrote off fully depreciated property, plant and equipment totaling $3,233 and $2,561, respectively. 5. INVENTORIES:
AUGUST 31, -------------------- 1994 1995 --------- --------- FEBRUARY 29, 1996 ------------ (UNAUDITED) Raw materials.............................................. $ 3,695 $ 4,850 $ 5,800 Work in process............................................ 1,667 1,455 929 Finished goods............................................. 3,079 3,528 3,464 --------- --------- ------------ $ 8,441 $ 9,833 $ 10,193 --------- --------- ------------ --------- --------- ------------
F-13 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 6. PROPERTY, PLANT AND EQUIPMENT:
AUGUST 31, ---------------------- 1994 1995 ---------- ---------- Buildings and land................................................... $ 11,989 $ 10,655 Machinery and equipment.............................................. 53,831 66,628 Leasehold improvements............................................... 2,472 3,052 ---------- ---------- 68,292 80,335 Less accumulated depreciation and amortization....................... (21,145) (27,203) ---------- ---------- $ 47,147 $ 53,132 ---------- ---------- ---------- ----------
Depreciation charged to operations was $4,946, $5,903 and $8,619 for the years ended August 31, 1993, 1994 and 1995, respectively. 7. DEBT: CURRENT PORTION OF LONG-TERM DEBT:
AUGUST 31, -------------------- 1994 1995 --------- --------- Term Loan Note A................................................................... $ 3,000 $ 4,000 Equipment Note..................................................................... 85 63 Development Note................................................................... 15 17 Capital Lease Obligations.......................................................... 64 Unsecured Notes.................................................................... 15 Canadian Term Loan Note............................................................ 744 Canadian Revolver Loan Note........................................................ 844 --------- --------- $ 3,179 $ 5,668 --------- --------- --------- ---------
LONG-TERM DEBT:
AUGUST 31, -------------------- 1994 1995 --------- --------- Term Loan Note A................................................................. $ 27,000 $ 23,000 Term Loan Note B................................................................. 30,000 30,000 Senior Subordinated Notes........................................................ 10,000 10,000 Revolving Loan Note.............................................................. 7,116 15,711 Canadian Term Loan Note.......................................................... 7,442 Equipment Note................................................................... 63 Development Note................................................................. 109 91 --------- --------- $ 74,288 $ 86,244 --------- --------- --------- ---------
SUBSEQUENT DEBT ISSUANCE (UNAUDITED): In connection with the Company's Note offering in October 1995, as described in Note 16, substantially all existing indebtedness, exclusive of the Development Note and the Canadian Term Loan and Revolver, has been repaid by the Company. At February 29, 1996, long term debt totalled $117.0 million and primarily consisted of $110.0 million of Senior Notes issued in October 1995 and F-14 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 7. DEBT: (CONTINUED) $6.9 million outstanding under the Canadian Term Loan Note. Current portion of long term debt totalled $819 and consisted primarily of $548 under the Canadian Term Loan Note and $183 under the Canadian Revolver Loan Note. TERM LOAN NOTES: Principal payments for Term Loan Note A were due quarterly in the amount of $750 through July 1, 1995, then increasing every fifth quarter to $1,000, $1,500, $2,000 and $2,250 with the final payment on July 1, 1999. Interest was payable monthly based on London Interbank Offered Rate (LIBOR) or the highest prime rate of selected reference banks, plus an applicable margin. At August 31, 1995, the interest rate was 9.14% (LIBOR, plus 3.25%). Principal payments for Term Loan B were due quarterly beginning on October 1, 1999 and ending on July 1, 2001 in the amount of $3,750. Interest was payable monthly based on LIBOR or the highest prime rate of selected reference banks, plus an applicable margin At August 31, 1995, the interest rate was 9.64% (LIBOR, plus 3.75%). The Term Loan Notes were subject to a Credit and Security Agreement in which the Company had granted a security interest in all of its assets. The Agreement required the Company to maintain certain specified coverage levels on interest expense and total debt service requirements. It also prohibited cash dividends and principal payments on subordinated debt, and limited new indebtedness and investments. The Company was in violation of certain covenants under the Term Loan Notes in the last quarter of 1995. Waivers and amendments were not obtained as the Company replaced all such indebtedness with new long-term, senior notes as described in Note 16. The Company's existing debt has been classified in accordance with its original terms since the new long-term indebtedness was obtained prior to issuance of the Company's financial statements. SENIOR SUBORDINATED NOTES: The Company's Senior Subordinated Notes bore interest at 13.5% payable quarterly. The full principal amount of the Senior Subordinated Notes was due on June 30, 2002; however the Senior Subordinated Notes could be prepaid in part or in full at any time, plus a premium based on yield differentials if the prepayment occurred prior to June 30, 1996. REVOLVING LOAN NOTE: The revolving credit facility was maintained to finance working capital requirements, and expired no later than July 1, 2001. The facility provided for borrowings based on eligible accounts receivable and inventories up to the commitment amount of $18,000. No amounts were due to be repaid until July 1, 2001, subject to collateral requirements; however the Company was permitted to prepay any portion thereof without penalty. Interest was payable monthly based on the highest prime rate of selected reference banks, plus an applicable margin and/or LIBOR plus an applicable margin. At August 31, 1995 the interest rate was 9.14% (LIBOR rate plus 3.25%) for approximately $14.0 million and 10.5% (prime rate plus 1.75%) for approximately $1.7 million. The Revolving Loan Note was subject to the same Credit and Security Agreement as the Term Loan Notes discussed above. EQUIPMENT NOTE: The Equipment Note was obtained to acquire machinery and equipment for the Company's Sumter, South Carolina facility. Interest is payable monthly based on a variable rate established as F-15 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 7. DEBT: (CONTINUED) 67% of the prime lending rate (8.75% at August 31, 1995). Principal is payable monthly in the amount of $7 with the final installment due on June 1, 1996. The Equipment Note is collateralized by the machinery and equipment that was purchased with the proceeds. DEVELOPMENT NOTE: The Company has a Development Note with the Bi-State Regional Commission. The Development Note bears interest at 4% with the final monthly payment due in May 2001. CANADIAN TERM LOAN NOTE: Principal payments for the Term Loan Note are due quarterly beginning on November 30, 1995 in the amount of $186, then increasing every fifth quarter to $372, $465, $512 and $512 with the final payment on August 31, 2000. The note agreement requires interest payments monthly based on the Canadian prime rate and/or Bankers Acceptances'. At August 31, 1995, the interest rate was 10.0%. The note agreement, also calls for mandatory prepayments after August 31, 1996, based upon financial calculations including excess cash flow. CANADIAN REVOLVING LOAN NOTE: The revolving credit facility is maintained to finance working capital requirements. The facility provides for borrowings based on eligible accounts receivable and inventories up to the commitment amount of $3,000. The principal is payable upon demand. Interest is payable monthly based on the Canadian prime rate overdraft and/or Bankers Acceptance. At August 31, 1995, the interest was 9.25%. CAPITAL LEASE OBLIGATIONS: The Company has a plant located in New Castle, Pennsylvania under a lease agreement with the local Industrial Development Authority. Lease payments were payable monthly in the amount of $5 through September 1994. In addition, the Company acquired certain equipment under noncancelable capital leases. The balance sheet includes the following items held under capital lease obligations:
AUGUST 31, -------------------- 1994 1995 --------- --------- Building................................................................................ $ 438 $ 438 Land.................................................................................... 65 65 Equipment............................................................................... 64 64 --------- --------- 567 567 Less accumulated amortization........................................................... (6) (63) --------- --------- $ 561 $ 504 --------- --------- --------- ---------
EXTRAORDINARY ITEMS FISCAL 1993 AND 1994: In connection with the Company's early extinguishment of debt in June 1994, certain costs, consisting primarily of loan fees of approximately $1,329 were written-off. These transactions have been reported as an extraordinary item in the statement of operations, net of an income tax benefit of approximately $539. In connection with the Company's October 1992 refinancing activities, certain costs, consisting of advisory fees of approximately $373, were incurred by the Company related to the early extinguishment of debt. In addition to these amounts, loan fees related to the extinguished debt of approximately F-16 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 7. DEBT: (CONTINUED) $694, and the unamortized portion of the warrant discount attributed to the original $10,000 Senior Subordinated Notes of approximately $414 were expensed in connection with this early extinguishment of debt. These transactions have been reported as an extraordinary item in the statement of operations, net of an income tax benefit of approximately $592. EXTRAORDINARY ITEM FISCAL 1996 (UNAUDITED): In connection with the Company's Note offering in October 1995, certain costs of approximately $2,109, consisting primarily of loan fees were expensed in connection with an early extinguishment of debt. This transaction has been reported as an extraordinary item in the statement of operations, net of an income tax benefit of approximately $844. FINANCING COSTS: In connection with debt offerings which were commenced but not completed, the Company expensed costs amounting to $625 in fiscal 1994. AGGREGATE MATURITIES OF LONG-TERM DEBT: The aggregate maturities of long-term debt as of August 31, 1995 are as follows:
TERM LOAN EQUIPMENT CANADIAN NOTES AND SENIOR NOTE AND TERM LOAN REVOLVING SUBORDINATED DEVELOPMENT AND REVOLVER FISCAL YEARS ENDED AUGUST 31 LOAN NOTE NOTES NOTE LOANS NOTE TOTAL - ----------------------------------------------- --------- ------------ ------------- ------------ --------- 1996........................................... $ 4,000 $ 80 $ 1,588 $ 5,668 1997........................................... 6,000 18 1,488 7,506 1998........................................... 8,000 19 1,860 9,879 1999........................................... 9,000 19 2,047 11,066 2000........................................... 30,711 20 2,047 32,778 Thereafter..................................... 15,000 $ 10,000 15 25,015 --------- ------------ ----- ------------ --------- $ 72,711 $ 10,000 $ 171 $ 9,030 $ 91,912 --------- ------------ ----- ------------ --------- --------- ------------ ----- ------------ ---------
8. OTHER LONG-TERM OBLIGATIONS: The Company has incurred certain liabilities in connection with agreements entered into with former owners, which include provisions for guaranteed bonuses and covenants not-to-compete, as follows:
AUGUST 31, -------------------- 1994 1995 --------- --------- Covenants under the acquisition of Nepco........................................... $ 3,694 $ 3,068 Covenants under the purchase of Portola Packaging Canada Ltd....................... 2,125 Other covenants.................................................................... 100 50 --------- --------- Total obligations.............................................................. 3,794 5,243 Current portion (included in accrued liabilities).................................. 668 1,332 --------- --------- $ 3,126 $ 3,911 --------- --------- --------- ---------
F-17 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 9. COMMITMENTS AND CONTINGENCIES: The Company leases certain office, production and warehouse facilities under operating lease agreements expiring on various dates through 2007. Under the terms of the facilities' leases, the Company is responsible for common area maintenance expenses which include taxes, insurance, repairs and other operating costs. At August 31, 1995 future minimum rental commitments under agreements with terms in excess of twelve months were as follows:
LEASED FROM THREE SISTERS OTHER FISCAL YEARS ENDED AUGUST 31, (NOTE 15) LEASES TOTAL - --------------------------------------------------------------------- --------------- --------- --------- 1996................................................................. $ 719 $ 1,062 $ 1,781 1997................................................................. 276 961 1,237 1998................................................................. 842 842 1999................................................................. 853 853 2000................................................................. 803 803 Thereafter........................................................... 3,192 3,192 ----- --------- --------- $ 995 $ 7,713 $ 8,708 ----- --------- --------- ----- --------- ---------
Base rent expense for the years ended August 31, 1993, 1994 and 1995 totaled $886, $1,395 and $1,381, respectively, of which $619, $696 and $720, was paid to Three Sisters (Notes 15 and 16) for the years ended August 31, 1993, 1994 and 1995, respectively. The Company is engaged in litigation related to alleged patent infringement on five-gallon non-spill caps. On February 1995, a jury rendered an adverse verdict against the Company, which verdict was entered by the court on January 2, 1996. All further motions were denied by the court upon entry of the jury verdict, making the Company liable for damages of $0.01 per closure unit sold. The Company is likely to have to pay $0.01 per closure unit in damages, totaling approximately $1,410 on sales through August 31, 1995, as well as on sales occurring thereafter. These amounts have been and will continue to be accrued in the Company's financial statements in the period in which sales occurred or continue to occur. The Company is also a party to a number of other lawsuits and claims arising out of the normal course of business. Management does not believe the final disposition of these matters will have a material adverse effect on the financial position, results of operations or cash flows of the Company. The financial statements include costs related to the litigation, including accruals for damages and attorney costs of $410, $603 and $1,382 for the years ended August 1993, 1994, and 1995, respectively. 10. REDEEMABLE WARRANTS: The Company has outstanding two warrants to purchase an aggregate of 2,493 shares of its Class A common stock which were issued to the Company's previous subordinated and senior lenders. A warrant to purchase 2,053 shares of common stock is exercisable, in whole or in part, through June 30, 2004 at sixty and two-third cents per share, subject to certain antidilution provisions. After June 30, 1999, if the Company has not completed an initial public offering of its common stock, the lender may require the Company to purchase the warrant at a price equal to the higher of the current fair value per share of the Company's common stock or an amount computed under an earnings formula in the warrant agreement. The purchase obligation may be suspended under certain circumstances including restrictions on such payments as specified in the senior and subordinated credit F-18 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 10. REDEEMABLE WARRANTS: (CONTINUED) agreements. After December 31, 2001, the Company has the right to repurchase the warrant at a price equal to the higher of the fair value per share of the Company's common stock or an amount computed under an earnings formula in the warrant agreement. The earnings formula is based on income before interest, taxes and debt outstanding to calculate an estimated value per share. At August 31, 1994 and 1995, the accretion was determined using the fair market value of the common stock. A second warrant to purchase 440 shares of Class A common stock may be exercised at any time until its expiration on June 30, 2004. After August 1, 2001, if the Company has not completed an initial public offering of its common stock, the senior lender may require the Company to purchase its warrant at a price equal to the higher of the current fair value price per share of the Company's common stock or the net book value price per share of the Company's common stock or the net book value per share as computed under a valuation formula set forth in the warrant. The purchase obligation may be suspended under certain circumstances including restriction on such payments as specified in the senior and subordinated credit agreements. After December 31, 1997, the Company has the right to repurchase the warrant at a price equal to the higher of the current fair value per share of the Company's common stock or the net book value per share. The earnings formula is based on earnings before interest and taxes and debt outstanding to calculate an estimated value per share. At August 31, 1994 and 1995, the put value was determined using the current fair value of the common stock. Both warrants were amended and restated in connection with the Company's June 1994 refinancing activities, which resulted in no change to their carrying value. Generally accepted accounting principles require that an adjustment of the warrant from the value assigned at the date of issuance to the highest redemption price of the warrant be accreted over the period of the warrant. At August 31, 1995, the estimated redemption value of the warrants exceeds their carrying value. The difference is being charged to accumulated deficit over the period from the date of issuance to the earliest put date of the warrants. Charges to accumulated deficit related to the warrants amounted to $7, $455 and $610 during the years ended August 31, 1993, 1994 and 1995, respectively. 11. SHAREHOLDERS' EQUITY: REINCORPORATION: In June 1994, the Company was reincorporated from California to Delaware, at which time the Company's outstanding common stock was exchanged on a one share of the California corporation common stock for one share of the Delaware corporation common stock. CLASS A AND B COMMON STOCK: The Company has authorized 2,503 shares of Class A common stock for the warrants described in Note 10. Class A common shareholders are not entitled to elect members of the Board of Directors. In the event of an aggregate public offering exceeding $10,000, the Class A and Class B, Series 2 common stock is automatically converted into Class B, Series 1 common stock, based on the appropriate conversion formula. The Class B common shareholders have the right to elect members of the Board of Directors, with the holders of Series 1 having one vote per share, and the holders of Series 2 having a number of votes equal to the number of shares into which the Series 2 shares are convertible into Series 1 shares. In the event of liquidation or dissolution in which the value of the Company is less than $1.75 per share of common stock, the holders of Class B, Series 2 will receive 60% of the proceeds until they have F-19 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 11. SHAREHOLDERS' EQUITY: (CONTINUED) received $1.75 per share. All other amounts available for distribution shall be distributed to the Class B, Series 1 and Series 2 holders pro rata based on the number of shares outstanding. If the value of the Company is greater than or equal to $1.75 per share, the holders of all classes of common stock are entitled to a pro rata distribution based on the number of shares outstanding. The Company is required to reserve shares of Class B, Series 1 stock for the conversion of Class A and Class B, Series 2 into Class B, Series 1 common stock. DIRECTORS' AGREEMENTS: The Company entered into the Directors' Agreements dated September 1989 and amended in January 1990, with certain directors who are also shareholders of the Company. The agreements provided that the Company is to pay up to $22 per year to each individual for serving as a director, and granted each director the right to purchase up to 22 shares per year of Class B, Series 1 common stock at $1.00 per share. In October 1990, the Company entered into a Director's Agreement with another director, who is also a shareholder of the Company. The agreement provided that the Company pay up to $22 per year for services as a director. During the years ended August 31, 1993, 1994 and 1995, the Company paid $81, $82 and $64, respectively, in director fees and related expenses. During the year ended August 31, 1993, the Company issued 11 shares of Class B, Series 1 common stock pursuant to the stock purchase agreements. STOCK OPTION PLANS: The Company has reserved 2,866 and 1,000 shares of Class B, Series 1 common stock for issuance under the Company's 1988 and 1994 stock option plans, respectively. Under both plans, stock options are granted by the Board of Directors at prices not less that 85% of fair market value of the Company's stock at the date of grant.
OPTION PRICE AVAILABLE OUTSTANDING PER SHARE FOR GRANT SHARES AMOUNT STOCK OPTIONS -------------- ----------- ----------- --------- (NOT THOUSANDS) - ----------------------------------------------------------------------------- August 31, 1992.............................................. $0.61-$2.50 300 2,415 $ 1,945 Granted.................................................... $2.50 (160) 160 400 Exercised.................................................. $0.61-$1.00 (1,363) (832) ----- ----------- --------- August 31, 1993.............................................. $0.61-$2.50 140 1,212 1,513 Granted.................................................... $2.50 (70) 70 175 Exercised.................................................. $2.50 (10) (25) Canceled................................................... $1.75 25 (25) (44) ----- ----------- --------- August 31, 1994.............................................. $0.61-$2.50 95 1,247 1,619 Reservation of shares...................................... 1,000 Granted.................................................... $3.75-$4.00 (370) 370 1,456 Exercised.................................................. $0.61-$4.00 (96) (78) Canceled................................................... $4.00 9 (9) (36) ----- ----------- --------- August 31, 1995.............................................. $0.61-$4.00 734 1,512 $ 2,961 ----- ----------- --------- ----- ----------- ---------
At August 31, 1995, approximately 1,011 options were exercisable at an average exercise price of $1.24 per share. F-20 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 12. EMPLOYEE BENEFIT PLANS: On December 31, 1994, the Company merged its Profit Sharing Plan and its Retirement and Savings Plan with those of a subsidiary company, establishing a single defined contribution plan. The employee benefits plan covers all full time employees of the Company who are age twenty one or older, have completed one year of service and are not covered by a collective bargaining agreement. Contributions are at the discretion of the Board of Directors and amounted to $360 for the year ended August 31, 1995. Expense in connection with the Plan amounted to $23 for the year ended August 31, 1995. The Company incurred expense related to prior employee benefit plans of $224 and $248 for the years ended August 31, 1993 and 1994, respectively. 13. INCOME TAXES: The provision for income taxes, excluding extraordinary items, for the three years ended August 31, 1995 consists of the following:
YEAR ENDED AUGUST 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Current: Federal...................................................... $ 721 $ 1,013 $ 1,677 State........................................................ 260 344 300 Foreign...................................................... (29) --------- --------- --------- 981 1,357 1,948 --------- --------- --------- Deferred: Federal...................................................... 456 (176) (605) State........................................................ 84 (86) (86) Foreign...................................................... 37 --------- --------- --------- 540 (262) (654) --------- --------- --------- $ 1,521 $ 1,095 $ 1,294 --------- --------- --------- --------- --------- ---------
As discussed in Note 3, "Summary of Significant Accounting Policies," the Company adopted SFAS No. 109 effective September 1, 1993. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109; however, prior year business combinations have been restated as of September 1, 1993 under SFAS No. 109. A reconciliation setting forth the differences between the effective tax rate of the Company and the U.S. federal statutory tax rate is as follows:
YEAR ENDED AUGUST 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Federal statutory rate........................................... 34.0% 34.0% 34.0% State taxes...................................................... 8.4 6.6 14.9 Nondeductible amortization and depreciation...................... 13.3 7.4 26.0 Nondeductible permanent items.................................... 7.0 Other............................................................ 0.2 1.9 8.3 --- --- --- Effective income tax rate........................................ 55.9% 49.9% 90.2% --- --- --- --- --- ---
F-21 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 13. INCOME TAXES: (CONTINUED) The components of the net deferred tax liabilities:
AUGUST 31, -------------------- 1994 1995 --------- --------- Deferred tax assets: Federal credits........................................................ $ 651 $ 651 State tax credits...................................................... 360 360 Accounts receivable...................................................... 158 313 Other liabilities........................................................ 580 924 --------- --------- Total assets......................................................... 1,749 2,248 --------- --------- Deferred tax liabilities: Property, plant, and equipment......................................... 7,227 7,354 Intangible assets...................................................... 1,031 712 Foreign taxes, net..................................................... 37 --------- --------- Total liabilities.................................................... 8,258 8,103 --------- --------- Net deferred tax liabilities....................................... $ 6,509 $ 5,855 --------- --------- --------- ---------
14. EXPORT SALES: Export sales to unaffiliated customers were $6,674, $8,071 and $18,658 for the years ended August 31, 1993, 1994 and 1995, respectively. Export sales are predominantly to North America, the Middle East and the Pacific Rim. During fiscal 1995, export sales to North America, the Middle East and the Pacific Rim accounted for 46%, 7%, and 16% of total export sales, respectively. 15. RELATED PARTY TRANSACTIONS: The Company paid $183, $162 and $5 for the years ended August 31, 1993, 1994 and 1995, respectively, to a company for prototype mold development and mold engineering work. A director and officer of the aforementioned company is also a director of the Company. The Company paid $451, $420 and $333 for the years ended August 31, 1993, 1994 and 1995, respectively, to a law firm for legal services rendered. A general partner of the aforementioned firm is also a director of the Company. The Company paid $42 for the years ended August 31, 1993, 1994 and 1995 to a corporation for management fees. A shareholder of the aforementioned corporation is also a director and significant shareholder of the Company. The Company paid $211 for the year ended August 31, 1993 to an investment banking firm for fees and expenses, a director of which is a director of the Company. The Company had debt outstanding with a financial institution of $10,000 at August 31, 1993, 1994 and 1995 on which the Company paid interest of approximately $1,350 for each of the last three fiscal years. The Company also paid $220 and $258 for the years ended August 31, 1993 and 1994, respectively, to the same financial institution for ongoing corporate advice and in connection with the refinancing in fiscal years 1993 and 1994. The Company has amounts receivable from non-consolidated affiliated companies which amounted to $156, $421 and $736 as of August 31, 1993, 1994 and 1995, respectively. F-22 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) 15. RELATED PARTY TRANSACTIONS: (CONTINUED) The Company leases certain office, production and warehouse facilities from Three Sisters Ranch Enterprises (Three Sisters). Certain general partners in Three Sisters are also minority shareholders in the Company. The Company owed $156 and $15 at August 31, 1993 and 1994, respectively, in the form of unsecured notes due to Three Sisters. The notes were repaid in fiscal 1995. 16. SUBSEQUENT EVENTS: On October 2, 1995 the Company completed an offering of $110,000 of senior notes that mature on October 1, 2005 and bear interest at 10.75%. Interest is payable semi-annually on April 1 and October 1 of each year, commencing on April 1, 1996. In connection with the offering, the Company repaid outstanding debt under its Term Loan Notes A and B, Senior Subordinated Notes and Revolving Loan Note. The Company incurred an extraordinary loss due to the write-off of approximately $1.9 million of unamortized debt financing costs. The senior notes have restrictive covenants which limit the payment of dividends and restrict certain investment transactions. Concurrently with the offering, the Company entered into a new five-year senior revolving credit facility of up to $35 million, subject to a borrowing base of eligible receivables, inventory, property, plant and equipment, which serve as collateral for the line. The credit facility contains convenants and provisions that restrict, among other things, the Company's ability to: (i) incur additional indebtedness, (ii) incur liens on its property, (iii) make investments, (iv) enter into guarantees and other contingent obligations, (v) merge or consolidate with or acquire another person or engage in other fundamental changes, (vi) engage in certain sales of assets, (vii) engage in certain transactions with affiliates and (viii) make restricted junior payments. SUBSEQUENT EVENTS (UNAUDITED): Of the approximately $106 million net proceeds of the offering, $83 million was used to retire the Company's outstanding debt under its senior term loans, revolving facility and senior subordinated notes. Subsequent to the closing of the offering, $7.2 million of the proceeds was used to purchase the Company's San Jose facilities, $10.8 million was used to purchase machinery and equipment, $3 million was used to make a loan to the Company's 50% joint venture in Mexico, and $2 million was used for working capital needs. F-23 PROSPECTUS $110,000,000 PORTOLA PACKAGING, INC. 10 3/4% SENIOR NOTES DUE 2005 [LOGO] ------------------ The 10 3/4% Senior Notes due 2005 (the "Notes") are being offered by Portola Packaging, Inc. (the "Company" or "Portola"). Interest on the Notes will be payable semiannually on April 1 and October 1 of each year, commencing April 1, 1996. The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after October 1, 2000, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, on or prior to October 1, 1998, the Company may redeem up to $33.0 million principal amount of the Notes with the proceeds of one or more Public Equity Offerings at 110.75% of the aggregate principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption; PROVIDED that Notes having an aggregate principal amount of at least $77.0 million remain outstanding immediately after any such redemption. Upon the occurrence of a Change of Control, each holder of Notes may require the Company to repurchase all or a portion of such holder's Notes at 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. Under certain circumstances, an event constituting a Change of Control will result in an event of default under the Company's New Credit Facility. See "Description of the Notes." The Notes will be unsecured senior obligations of the Company and will rank PARI PASSU in right of payment with all other existing and future senior indebtedness of the Company and senior in right of payment to any future subordinated indebtedness of the Company. The Notes, however, will be effectively subordinated to senior secured indebtedness of the Company with respect to the assets securing such indebtedness, including any indebtedness that may be incurred from time to time under the Company's New Credit Facility. As of May 31, 1995, after giving effect to the sale of the Notes offered hereby and the application of net proceeds to repay certain indebtedness, the Company would have had $0.2 million of senior indebtedness outstanding (other than the Notes) and would have had, subject to certain restrictions, the ability to draw up to $23.7 million of the $35.0 million committed under the New Credit Facility. FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" ON PAGE 10. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) COMPANY(1)(3) --------------------- --------------------- --------------------- Per Note.............................................. 100.0% 2.875% 97.125% Total................................................. $110,000,000 $3,162,500 $106,837,500
- ------------------------------ (1) Plus accrued interest, if any, from October 2, 1995. (2) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses estimated at $750,000, payable by the Company. ------------------------------ The Notes are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, and subject to approval of certain legal matters by counsel for the several Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery will be made in New York, New York on or about October 2, 1995. This Prospectus may be used by Chase Securities, Inc. in connection with offers and sales related to market making transactions in the Notes. Chase Securities, Inc. may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of sale. Chase Securities, Inc. will not confirm such sales to any accounts over which it exercises discretionary authority without the prior specific written approval of the customer. CHASE SECURITIES, INC. SALOMON BROTHERS INC September 27, 1995. The Company's small and widemouth closures are used to cap many well known beverage and food products. The Company's five gallon and five gallon non-spill closures are used to cap glass and plastic returnable water cooler bottles. New products added by the Company to its product line include fitments and push-pull closures used to cap a variety of beverage products. This page contains three color photographs displaying the Company's products on various types of plastic bottles and other plastic containers. ------------------------ Cap Snap-Registered Trademark-, Snap Cap-Registered Trademark-, Cap Snap Seal-Registered Trademark-, Portola Packaging-Registered Trademark-, Nepco-Registered Trademark-, Non-Spill-Registered Trademark- and the Portola logo are registered trademarks of the Company. All other product names of the Company are trademarks of the Company. The use of any trademark herein is in an editorial fashion only, and to the benefit of the owner thereof, with no intention of commercial use or infringement of the trademark. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, CONSOLIDATED FINANCIAL STATEMENTS AND PRO FORMA AND AS ADJUSTED FINANCIAL INFORMATION OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "COMPANY" AND "PORTOLA" REFER TO PORTOLA PACKAGING, INC., A DELAWARE CORPORATION, ITS PREDECESSOR, PORTOLA PACKAGING, INC., A CALIFORNIA CORPORATION, AND ITS SUBSIDIARIES. THE COMPANY CURRENTLY HAS TWO OPERATING SUBSIDIARIES, ONE IN CANADA AND ONE IN THE UNITED KINGDOM, BOTH OF WHICH ARE UNRESTRICTED SUBSIDIARIES UNDER THE INDENTURE GOVERNING THE NOTES (THE "INDENTURE"). ALL REFERENCES HEREIN TO FISCAL YEAR ARE TO THE COMPANY'S FISCAL YEAR ENDED AUGUST 31. THE COMPANY The Company is a leading designer, manufacturer and marketer of tamper evident plastic closures and related equipment used for packaging applications in dairy, fruit juice, bottled water, sports drinks, institutional food products and other non-carbonated beverage products. The Company's principal closure product lines include (i) small closures used to cap blowmolded plastic bottles ("small closures"), (ii) closures for five gallon returnable glass and plastic water cooler bottles ("five gallon closures") and (iii) widemouth closures for institutional food products ("widemouth closures"). Portola also designs, manufactures and supplies high speed capping equipment and complete turnkey water bottling systems, which are marketed by the Company primarily under the name "PortaPlant." Portola's closure products are manufactured domestically through a technologically advanced, high speed injection molding process at ten modern strategically located manufacturing facilities. Management believes that the Company is a leader in a majority of the markets it serves and that it is the sole or the largest supplier of plastic closures for a majority of its customers. The Company sells over 8 billion closures annually under the names Cap Snap, Nepco, Portola and other brand names to over 3,000 customers. Most of the Company's customers have been doing business with the Company for more than ten years. The Company's products are used to cap such well known consumer products as Borden milk, Dole juices, Procter & Gamble's Sunny Delight juice drink, Poland Spring bottled water, Pepsi-Cola fountain syrups and Kraft barbecue sauce. Many features of the Company's closure products are proprietary, and Portola holds more than 50 patents on the design of container closures and compatible bottle necks. During the past decade, the plastic closure market has grown faster than the overall closure market in the United States. This growth is primarily due to the distinct advantages that plastic closures have over metal closures, including greater performance and design flexibility, the growing demand for tamper evident packaging and the comparatively lower cost and lighter weight of plastic closures, an important factor in the packaging industry, where transportation costs are a significant portion of overall product costs. Demand for plastic closures has also grown with the increased use of plastic containers and the conversion of paperboard containers to plastic containers. A 1994 study by Technomic Consultants International, an international marketing consulting firm which specializes in the food and packaging industries, indicates that the market for plastic closures in the United States grew from approximately 48% of total closures in 1990 to approximately 59% of total closures in 1993. The study also indicates that the average annual growth rate from 1993 through 1996 for plastic closures is expected to be 4.4%, while demand for metal closures during this period is expected to increase at a significantly lower rate. Since Portola was acquired from the founding family in 1986 by a group led by Jack L. Watts, the Company's current Chairman of the Board and Chief Executive Officer, the size of the Company as measured by sales and closure unit volume has increased from $26.1 million in sales and 2.1 billion in units sold for fiscal 1987 to $112.1 million in sales and 8.1 billion in units sold for the twelve months ended May 31, 1995, respectively. Mr. Watts and other members of senior management own or control 34.3%, on a fully diluted basis, of the common stock of the Company. Portola's senior management has significant experience in the plastic packaging business and an average tenure of eight years at the Company. The Company's principal offices are located at 890 Faulstich Court, San Jose, California 95112. The Company's telephone number is (408) 453-8840. 3 COMPETITIVE STRENGTHS The Company believes that it has a strong competitive position attributable to a number of factors, including the following: -HIGH QUALITY, INNOVATIVE PRODUCTS. Management believes that Portola's leading position in niche product applications is in part the result of the Company's long-standing commitment to research and development, which has led to innovative product development and application improvements, including designs for tamper evident tear strips and breakaway bands which have become industry standards. -STRONG REPUTATION FOR CUSTOMER SERVICE AND SUPPORT. Portola markets its products together with ongoing service and support as "total product solutions" designed to meet its customers' complete capping requirements, enabling it to develop a reputation as a leader in quality and service. -LOW COST MANUFACTURING CAPABILITIES. The Company's manufacturing operations emphasize minimizing raw material and production costs and, with the acquisition and integration of Northern Engineering & Plastics Corp. and certain related companies and assets (collectively, "Nepco"), the Company has also derived significant cost savings through improved raw material purchasing and increased production efficiencies. BUSINESS STRATEGY The Company's primary strategy is to increase cash flow by maintaining and extending its leading position in niche product applications within the plastic closure and bottling industry. To support this strategy, the Company focuses on (i) advancing research and development and product engineering, (ii) providing dedicated customer support and total product solutions for customers, (iii) continuing to enhance its low cost manufacturing capabilities, (iv) expanding sales in international markets where significant growth opportunities exist and (v) where appropriate, seeking strategic acquisitions that will strengthen the Company's competitive position. Consistent with the Company's objective to expand through strategic acquisitions, on June 30, 1994, the Company acquired Nepco for a purchase price of $40.0 million (plus $3.6 million related to noncompetition agreements). The acquisition of Nepco has enabled the Company to establish new customer relationships, diversify and expand its product offering and customer base and benefit from Nepco's proprietary product designs. The Company has realized and expects to achieve additional cost savings and synergies associated with the integration of Nepco, primarily from reduced costs achieved through sharing and adoption of improved technology and manufacturing processes, lower raw material costs through volume purchasing economies, marketing efficiencies and elimination of duplicative administrative and financial staff positions. On June 16, 1995, the Company purchased for C$14.6 million (plus C$3.4 million related to noncompetition agreements) the 50% interest it had not previously owned in Canada Cap Snap Corporation, a British Columbia corporation engaged in manufacturing and distributing small closures in western Canada, together with all the capital stock of two affiliated plastic bottle manufacturers (the "Canadian Acquisition"). Management anticipates that the Canadian Acquisition will enable the Company to establish a position in the Canadian bottle manufacturing marketplace and to advance its position in the Canadian closure marketplace. 4 THE OFFERING Securities Offered...... $110,000,000 aggregate principal amount of 10 3/4% Senior Notes due 2005. Maturity Date........... October 1, 2005. Interest Payment Dates.................. April 1 and October 1 of each year, commencing April 1, 1996. Optional Redemption..... The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after October 1, 2000, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, on or prior to October 1, 1998, the Company may redeem up to $33.0 million principal amount of the Notes with the proceeds of one or more Public Equity Offerings at 110.75% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption; PROVIDED that Notes having an aggregate principal amount of at least $77.0 million remain outstanding immediately after any such redemption. See "Description of the Notes -- Optional Redemption." Change of Control....... Upon the occurrence of a Change of Control, each holder of Notes may require the Company to repurchase all or a portion of such holder's Notes at 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that the Company will have sufficient funds to pay the repurchase price for Notes tendered upon a Change of Control. See "Risk Factors -- Limitations on Repurchase of Notes"; "Description of the Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking................. The Notes will be unsecured senior obligations of the Company and will rank PARI PASSU in right of payment with all other existing and future senior indebtedness of the Company and senior in right of payment to any future subordinated indebtedness of the Company. The Notes, however, will be effectively subordinated to senior secured indebtedness of the Company with respect to the assets securing such indebtedness, including any indebtedness that may be incurred from time to time under the Company's New Credit Facility. As of May 31, 1995, after giving effect to the sale of the Notes and the application of net proceeds to repay certain indebtedness, the Company would have had $0.2 million of senior indebtedness outstanding (other than the Notes) and would have had, subject to certain restrictions, the ability to draw up to $23.7 million of the $35.0 million committed under the New Credit Facility. See "Capitalization" and "Description of the New Credit Facility." Certain Covenants....... The Indenture will contain certain covenants, including limitations on the incurrence of indebtedness, the making of restricted payments, transactions with affiliates, the existence of liens, disposition of proceeds of asset sales, transfers and issuances of stock of subsidiaries, the imposition of certain payment restrictions on restricted subsidiaries and certain mergers and sales of assets. See "Description of the Notes -- Certain Covenants." Use of Proceeds......... The net proceeds from the sale of the Notes (estimated to be approximately $106.1 million) will be used (i) to repay all outstanding indebtedness under the Company's current revolving credit and term loan facilities, (ii) to redeem existing subordinated indebtedness and (iii) for working capital and general corporate purposes, including capital expenditures and the possible purchase of certain facilities currently leased (as well as certain real property adjacent thereto) by the Company.
5 SUMMARY HISTORICAL AND PRO FORMA AS ADJUSTED CONDENSED COMPANY-ONLY FINANCIAL DATA The following table sets forth certain summary historical and pro forma as adjusted condensed financial data for the Company, giving no effect to the Canadian Acquisition ("Company-only" data). The summary historical statement of operations and balance sheet data for each of the fiscal years in the three year period ended August 31, 1994 and at the end of each such fiscal year have been derived from, and are qualified by reference to, the Company's audited consolidated financial statements. The summary historical statement of operations and balance sheet data for the nine months ended May 31, 1994 and 1995 and at such dates, have been derived from the unaudited consolidated financial statements of the Company. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of the Company and related notes and other financial information appearing elsewhere in this Prospectus. The summary unaudited pro forma as adjusted condensed Company-only statement of operations data for the fiscal year ended August 31, 1994 give effect to (i) the acquisition of Nepco and (ii) the sale of the Notes and the application of net proceeds to repay certain indebtedness, as if such transactions had occurred on September 1, 1993. The summary unaudited as adjusted condensed Company-only statement of operations data for the nine months ended May 31, 1995 and for the twelve months ended May 31, 1995 give effect to the sale of the Notes and the application of net proceeds to repay certain indebtedness as if such transactions had occurred on September 1, 1994 and June 1, 1994, respectively. The summary unaudited as adjusted condensed Company-only balance sheet data at May 31, 1995 give effect to the sale of the Notes and the application of the net proceeds to repay certain indebtedness and for working capital as if such transactions had occurred on such date. The pro forma as adjusted and as adjusted Company-only data should be read in conjunction with "Unaudited Pro Forma As Adjusted Condensed Consolidated Financial Data" appearing elsewhere in this Prospectus. Such data are not necessarily indicative of the results that would have occurred if the Nepco acquisition and the sale of the Notes had been consummated on the assumed dates and are not necessarily indicative of future results.
COMPANY-ONLY PRO FORMA FISCAL YEAR ENDED AUGUST 31, AS ADJUSTED NINE MONTHS ENDED FISCAL YEAR ENDED MAY 31, -------------------------------- AUGUST 31, -------------------- 1992 1993 1994 1994(A)(B) 1994(C) 1995(C) --------- --------- ---------- -------------------- --------- --------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales..................................... $ 52,152 $ 58,286 $ 70,284 $ 101,415 $ 44,624 $ 86,462 Gross profit.............................. 14,476 15,607 18,614 22,246 11,641 20,788 Income from operations.................... 6,094 6,180 7,004 5,175 4,540 7,325 Interest expense, net..................... 3,147 3,044 3,899 11,904 2,464 6,131 Amortization of debt financing costs...... 365 479 433 390 309 360 Income (loss) before extraordinary item, cumulative effect of change in accounting principle and income taxes............... 1,950 2,719 2,195 (7,360) 1,773 894 Net income (loss)......................... 663 309 225 (7,062) 915 377 Earnings (loss) per share................. $ 0.05 $ 0.02 $ 0.02 $ (0.53) $ 0.07 $ 0.03 BALANCE SHEET DATA (AT END OF PERIOD): Working capital........................... $ 2,920 $ 7,109 $ 11,049 -- $ 4,633 $ 14,776 Total assets.............................. 44,031 50,896 110,820 -- 54,706 112,422 Total debt................................ 30,611 38,140 77,467 -- 35,634 82,335 Redeemable warrants(f).................... 2,483 2,600 3,055 -- 2,747 3,512 Total shareholders' equity................ 2,719 2,597 5,393 -- 3,366 5,395 CASH FLOW DATA: Net cash provided by operating activities............................... $ 7,699 $ 6,768 $ 9,351 -- $ 7,450 $ 2,920 Net cash used in investing activities..... (8,947) (9,119) (38,418) -- (5,458) (8,989) Net cash provided by (used in) financing activities............................... 229 3,538 30,099 -- (2,556) 4,355 OPERATING AND OTHER DATA: Closure unit volume (in millions)......... 3,763 3,980 4,893 7,967 2,953 6,170 Closure unit volume growth(h)............. 11.5% 5.8% 22.9% 11.6%(i) 2.1% 108.9% EBITDA(j)................................. $ 11,085 $ 12,883 $ 14,728 $ 16,432 $ 9,763 $ 16,960 Depreciation and amortization............. 5,920 6,845 8,357 11,611 5,271 9,089 Capital expenditures...................... 8,089 9,564 6,159 11,550 4,212 8,247 Ratio of earnings to fixed charges(k)..... 1.4x 1.3x 1.2x -- 1.6x 1.1x Ratio of EBITDA to interest expense, net...................................... Ratio of total debt to EBITDA............. (FOOTNOTES ON FOLLOWING PAGE) COMPANY-ONLY AS COMPANY-ONLY AS ADJUSTED TWELVE ADJUSTED NINE MONTHS ENDED MAY MONTHS ENDED MAY 31, 31, 1995(A)(D) 1995(A)(D)(E) ---------------- ---------------- STATEMENT OF OPERATIONS DATA: Sales..................................... $ 86,462 $ 112,122 Gross profit.............................. 20,788 27,761 Income from operations.................... 7,325 9,789 Interest expense, net..................... 8,973 11,865 Amortization of debt financing costs...... 292 390 Income (loss) before extraordinary item, cumulative effect of change in accounting principle and income taxes............... (1,880) (2,889) Net income (loss)......................... (3,335) (3,233) Earnings (loss) per share................. $ (0.24) $ (0.23) BALANCE SHEET DATA (AT END OF PERIOD): Working capital........................... $ 42,900 $ 42,900 Total assets.............................. 137,722 137,722 Total debt................................ 110,197 110,197 Redeemable warrants(f).................... 3,512 3,512 Total shareholders' equity................ 3,858(g) 3,858(g) CASH FLOW DATA: Net cash provided by operating activities............................... -- -- Net cash used in investing activities..... -- -- Net cash provided by (used in) financing activities............................... -- -- OPERATING AND OTHER DATA: Closure unit volume (in millions)......... -- 8,110 Closure unit volume growth(h)............. -- 100.6% EBITDA(j)................................. $ 16,960 $ 21,924 Depreciation and amortization............. 9,021 12,081 Capital expenditures...................... 8,247 10,194 Ratio of earnings to fixed charges(k)..... -- -- Ratio of EBITDA to interest expense, net...................................... 1.9x 1.8x Ratio of total debt to EBITDA............. -- 5.0x
6 (a) The Company believes that "Company-only" data is relevant to potential investors in the Notes because (i) the Company's Canadian subsidiary is separately financed by indebtedness that is non-recourse to the Company (except that the Company has pledged the capital stock of the Canadian subsidiary as security for the loans), (ii) the Canadian subsidiary is subject to significant restrictions on its ability to pay dividends or make other cash distributions or payments to the Company and (iii) the Canadian subsidiary will be operated as an Unrestricted Subsidiary for purposes of the Indenture and, as a result, amounts permitted to be invested by the Company in its Canadian subsidiary will be subject to significant limitation. (b) The Company-only pro forma as adjusted data reflect the historical operating data for the fiscal year ended August 31, 1994 as if the Nepco acquisition, the sale of the Notes and the application of net proceeds to repay certain indebtedness had occurred at the beginning of the period. For information regarding the pro forma adjustments, see "Pro Forma As Adjusted Condensed Consolidated Statement of Operations (Unaudited) for the Fiscal Year Ended August 31, 1994." (c) The nine months ended May 31, 1994 reflect operations before the Nepco acquisition on June 30, 1994, and the nine months ended May 31, 1995 reflect operations after the acquisition. (d) The Company-only as adjusted statement of operations and operating and other data give effect to the sale of the Notes and the application of net proceeds to repay certain indebtedness as if such transactions had occurred at the beginning of the period. See "Pro Forma As Adjusted Condensed Consolidated Statement of Operations (Unaudited) for the Nine Months Ended May 31, 1995." The Company-only as adjusted balance sheet data are adjusted as if the sale of the Notes and the application of the net proceeds therefrom to repay certain indebtedness and for working capital had occurred on May 31, 1995. (e) Includes one month of operations before the Nepco acquisition on June 30, 1994 and eleven months of operations after the acquisition. The Company-only as adjusted statement of operations and operating and other data for the twelve month period ended May 31, 1995 are included because this is the first twelve month period for which data is available during which substantially all the Company's actual (rather than pro forma) results reflect the Company's operation of the business conducted by Nepco prior to the acquisition. The data for the twelve month period were calculated by combining (i) unaudited data for the three month period ended August 31, 1994, and (ii) the unaudited data for the nine month period ended May 31, 1995 set forth elsewhere herein. (f) The redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company's common stock. If the Company does not complete an initial public offering of its common stock by June 30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the holders may require the Company to repurchase the warrants at the higher of current market value or an amount computed under the warrant agreement. (g) Total shareholders' equity, on an as adjusted basis, has been decreased to reflect the prepayment premium and the write-off of deferred financing costs associated with the repayment of the Company's existing subordinated indebtedness and the write-off of deferred financing costs associated with the repayment of the Company's current revolving credit and term loan facilities, all of which will be accounted for as an extraordinary loss on early extinguishment of debt. (h) Except as indicated in note (i) below, these results reflect closure unit volume growth of the Company including Nepco after June 30, 1994. On a pro forma combined basis, the closure unit volume growth for Portola and Nepco was 11.6%, 7.1% and 4.1% for the fiscal year ended August 31, 1994, the nine months ended May 31, 1995 and the twelve months ended May 31, 1995, respectively. (i) Reflects the percentage increase in the sales of closure units by the Company for the fiscal year ended August 31, 1994 as compared to the fiscal year ended August 31, 1993, computed on a pro forma basis as if the Nepco acquisition had occurred at the beginning of the respective fiscal years. (j) EBITDA represents, for any relevant period, income (loss) before income taxes, extraordinary item, cumulative effect of change in accounting principle, depreciation of property, plant and equipment, interest expense, net, amortization of intangible assets and non-recurring legal expenses associated with the Company's litigation with Scholle Corporation. See "Business -- Litigation." EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, net income, cash flow or other measures of performance in accordance with generally accepted accounting principles. EBITDA data and the related ratios are included because the Company understands that such information is used by certain investors as one measure of an issuer's historical ability to service debt and because certain restrictive covenants in the Indenture will be based on the Company's EBITDA. (k) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" represents income before provision for income taxes and fixed charges. "Fixed charges" consist of interest expense, amortization of debt financing costs and the portion of lease expense which management believes is representative of the interest component of lease expense. On a pro forma basis, as adjusted for (i) the acquisition of Nepco and (ii) the sale of the Notes offered hereby and the application of net proceeds to repay certain indebtedness, as if such transactions had occurred on September 1, 1993, September 1, 1994 and June 1, 1994, respectively, the ratio of earnings to fixed charges for the fiscal year ended August 31, 1994, the nine months ended May 31, 1995 and the twelve months ended May 31, 1995 would result in a deficiency of earnings to fixed charges in the amount of $10.6 million, $5.3 million and $4.9 million, respectively. 7 SUMMARY HISTORICAL AND PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED FINANCIAL DATA The following table sets forth certain summary historical and pro forma as adjusted condensed consolidated financial data of the Company, giving effect to the Canadian Acquisition ("consolidated" data). The summary unaudited pro forma as adjusted consolidated statement of operations and other data for the fiscal year ended August 31, 1994 give effect to (i) the acquisition of Nepco, (ii) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (iii) the Canadian Acquisition, as if such transactions had occurred on September 1, 1993. The pro forma as adjusted consolidated statement of operations and other data for the nine months ended May 31, 1995 give effect to (i) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (ii) the Canadian Acquisition, as if such transactions had occurred on September 1, 1994. The pro forma as adjusted consolidated balance sheet data for the nine months ended May 31, 1995 give effect to (i) the sale of the Notes and the application of the net proceeds to repay certain indebtedness and for working capital and (ii) the Canadian Acquisition, as if such transactions had occurred on such date. The pro forma as adjusted condensed consolidated financial data should be read in conjunction with "Unaudited Pro Forma As Adjusted Condensed Consolidated Financial Data" appearing elsewhere in this Prospectus. Such data are not necessarily indicative of the results that would have occurred if the acquisition of Nepco, the sale of the Notes and the Canadian Acquisition had been consummated on the assumed dates and are not necessarily indicative of future results.
CONSOLIDATED CONSOLIDATED PRO FORMA AS PRO FORMA FISCAL YEAR ENDED AUGUST 31, ADJUSTED NINE MONTHS ENDED MAY AS ADJUSTED FISCAL YEAR 31, NINE MONTHS ------------------------------- ENDED AUGUST ---------------------- ENDED MAY 31, 1992 1993 1994 31, 1994(A) 1994(B) 1995(B) 1995(C) --------- --------- --------- ------------- ----------- --------- ------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS AND OTHER DATA: Sales....................................... $ 52,152 $ 58,286 $ 70,284 $ 107,658 $ 44,624 $ 86,462 $ 93,964 Gross profit................................ 14,476 15,607 18,614 24,155 11,641 20,788 23,099 Income from operations...................... 6,094 6,180 7,004 6,011 4,540 7,325 7,985 Interest expense, net....................... 3,147 3,044 3,899 13,055 2,464 6,131 9,817 Amortization of debt financing costs........ 365 479 433 390 309 360 292 Income (loss) before extraordinary item, cumulative effect of change in accounting principle and income taxes................. 1,950 2,719 2,195 (7,599) 1,773 894 (1,367) Net income (loss)........................... 663 309 225 (7,286) 915 377 (3,415) Net income (loss) per share................. $ 0.05 $ 0.02 $ 0.02 $ (0.55) $ 0.07 $ 0.03 $ (0.25) Ratio of earnings to fixed charges (d)...... 1.4x 1.3x 1.2x -- 1.6x 1.1x -- BALANCE SHEET DATA (AT END OF PERIOD): Working capital............................. $ 2,920 $ 7,109 $ 11,049 -- $ 4,633 $ 14,776 $ 43,718 Total assets................................ 44,031 50,896 110,820 -- 54,706 112,422 152,349 Total debt.................................. 30,611 38,140 77,467 -- 35,634 82,335 119,952 Redeemable warrants(e)...................... 2,483 2,600 3,055 -- 2,747 3,512 3,512 Total shareholders' equity.................. 2,719 2,597 5,393 -- 3,366 5,395 5,658(f) (FOOTNOTES ON FOLLOWING PAGE)
8 (a) The pro forma as adjusted data reflect the historical operating data for the fiscal year ended August 31, 1994 as if (i) the Nepco acquisition, (ii) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (iii) the Canadian Acquisition had occurred at the beginning of the period. For information regarding the pro forma adjustments, see "Pro Forma As Adjusted Condensed Consolidated Statement of Operations (Unaudited) for the Fiscal Year Ended August 31, 1994." (b) The nine months ended May 31, 1994 reflect operations before the Nepco acquisition on June 30, 1994, and the nine months ended May 31, 1995 reflect operations after the acquisition. (c) The consolidated pro forma as adjusted statement of operations data give effect to (i) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (ii) the Canadian Acquisition as if such transactions had occurred at the beginning of the period. See "As Adjusted Condensed Consolidated Statement of Operations (Unaudited) for the Nine Months Ended May 31, 1995." The consolidated pro forma as adjusted balance sheet data are adjusted as if (i) the sale of the Notes and the application of the net proceeds therefrom to repay certain indebtedness and for working capital and (ii) the Canadian Acquisition, as if each had occurred on May 31, 1995. (d) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" represents income before provision for income taxes and fixed charges. "Fixed charges" consist of interest expense, amortization of debt financing costs and the portion of lease expense which management believes is representative of the interest component of lease expense. On a pro forma basis as adjusted for (i) the acquisition of Nepco, (ii) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (iii) the Canadian Acquisition, the ratio of earnings to fixed charges for the fiscal year ended August 31, 1994 and the nine months ended May 31, 1995 would result in a deficiency of earnings to fixed charges in the amount of $10.8 million and $5.3 million, respectively. (e) The redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company's common stock. If the Company does not complete an initial public offering of its common stock by June 30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the holders may require the Company to repurchase the warrants at the higher of current market value or an amount computed under the warrant agreement. (f) Total shareholders' equity, on a pro forma as adjusted basis, has been adjusted to reflect the sale for $1.8 million of 450,000 shares of the Company's common stock to finance in part the Canadian Acquisition and to reflect the prepayment premium and the write-off of deferred financing costs associated with the repayment of the Company's existing subordinated indebtedness and the write-off of deferred financing costs associated with the repayment of the Company's current revolving credit and term loan facilities, all of which will be accounted for as an extraordinary loss on early extinguishment of debt. 9 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE PURCHASING THE NOTES OFFERED HEREBY. SUBSTANTIAL LEVERAGE; LIMITATIONS ASSOCIATED WITH RESTRICTIVE COVENANTS As of May 31, 1995, after giving effect to the sale of the Notes and the application of the net proceeds therefrom, the Company would have had $110.2 million in indebtedness outstanding (including the indebtedness under the Notes) and would have had, subject to certain restrictions, the ability to draw up to $23.7 million of the $35.0 million committed under the New Credit Facility. Such indebtedness would have been substantially in excess of the Company's total shareholders' equity of $3.9 million. See "Use of Proceeds" and "Capitalization." As of May 31, 1995, approximately 16% of the Company's total assets was comprised of covenants not to compete and goodwill, and there can be no assurance that the carrying values of these assets will be recoverable. The degree to which the Company is leveraged could have important consequences to the holders of Notes, including the following: (i) the Company's ability to obtain financing for future working capital needs or for acquisitions or other purposes may be limited; (ii) a substantial portion of the Company's cash flow from operations will be dedicated to debt service, thereby reducing funds available for operations; (iii) certain of the Company's borrowings, including borrowings under the Company's New Credit Facility, will be at variable rates of interest, which could cause the Company to be vulnerable to increases in interest rates; and (iv) the substantial indebtedness and the restrictive covenants to which the Company is subject under the terms of its indebtedness may make the Company more vulnerable to economic downturns, may reduce its flexibility to respond to changing business conditions and opportunities and may limit its ability to withstand competitive pressures. The Company's ability to make scheduled payments of the principal of and interest on, or to refinance, its indebtedness will depend upon its future operating performance and cash flows which are subject to prevailing economic conditions, market conditions in the packaging industry, prevailing interest rates and financial, competitive, business and other factors, many of which may be beyond the Company's control. The New Credit Facility will contain numerous restrictive covenants that may limit the Company's operational and financing flexibility. A failure to comply with the obligations contained in the New Credit Facility or any agreements with respect to future indebtedness could result in an event of default under such agreements that could permit acceleration of the related debt and acceleration of debt under other agreements that may contain cross-acceleration or cross-default provisions. Other indebtedness of the Company that may be incurred in the future may contain financial or other covenants more restrictive than those applicable to the Notes or the New Credit Facility. See "Description of the New Credit Facility" and "Description of the Notes." EFFECTIVE SUBORDINATION OF NOTES IN CERTAIN CIRCUMSTANCES The Notes will not be secured by any of the Company's assets. The Indenture will permit the Company to incur certain secured indebtedness, including indebtedness under the New Credit Facility. If the Company becomes insolvent or is liquidated, or if payment under the New Credit Facility or other secured indebtedness is accelerated, the lenders under the New Credit Facility and the holders of any other secured indebtedness would be entitled to exercise the remedies available to them as secured creditors under applicable laws and pursuant to instruments governing such indebtedness. Accordingly, such secured indebtedness would have a prior claim on the collateral and would effectively be senior to the Notes to the extent that the value of such collateral is sufficient to satisfy the indebtedness secured thereby. To the extent that the value of such collateral is not sufficient to satisfy the secured indebtedness, amounts remaining outstanding on such indebtedness would be entitled to share with holders of Notes and other claims on the Company with respect to any other assets of the Company. In either event, because the Notes will not be secured by any of the Company's assets, it is possible that there would be insufficient assets remaining from which claims of the holders of the Notes could be satisfied. 10 In addition, as of the date of the Indenture the Notes will be obligations of the Company and not of any subsidiary, although the Indenture does require that any Restricted Subsidiary of the Company having assets with an aggregate fair market value in excess of $100,000 execute a guarantee in respect of the Notes. Currently, the Company's only material operating subsidiary is its Canadian subsidiary, which is being operated as an Unrestricted Subsidiary and which, as a result, will not guarantee the Company's obligations under the Notes. Upon liquidation of the Canadian subsidiary, as well as any other Unrestricted Subsidiary, such obligations would be effectively subordinated to claims of such subsidiary's creditors upon its assets. Moreover, the Canadian subsidiary is separately financed by indebtedness that is non-recourse to the Company (except that the Company has pledged the capital stock of the Canadian subsidiary as security for the loans) and, under the terms of such indebtedness, the Canadian subsidiary is subject to significant restrictions on its ability to pay dividends or make other cash distributions or payments to the Company. It is likely that this will also be the case for other Unrestricted Subsidiaries that the Company may form in the future. If in the future a Restricted Subsidiary is formed that guarantees the Company's obligations under the Notes, there can be no assurance that the guarantee would not be subject to avoidance as a fraudulent transfer or for other reasons. COMPETITION The Company faces direct competition in each of its product lines from a number of companies, some of which have financial and other resources that are substantially greater than those of the Company. As the Company broadens its product offerings, it can expect to meet increased competition from additional competitors with entrenched positions in those product lines. The Company also faces some direct competition from bottling companies and other food and beverage providers that elect to produce their own closures rather than purchase them from outside sources. In addition, the packaging industry has numerous well-capitalized competitors, and there is a risk that these companies will expand their product offerings, either through internal product development or acquisitions of any of the Company's direct competitors, to compete in the niche markets that are currently served by the Company. These competitors, as well as existing competitors, could introduce products or establish prices for their products in a manner that could adversely affect the Company's ability to compete. Because of the Company's product concentration, an increase in competition or any technological innovations with respect to the Company's specific product applications, such as the introduction of lower-priced competitive products or products containing technological improvements over the Company's products, could have a significant adverse effect on the Company's financial condition and results of operations. GOVERNMENTAL REGULATION The Company's products are subject to governmental regulation, including regulation by the Federal Food and Drug Administration and other agencies with jurisdiction over effectiveness of tamper-resistant devices and other closures for dairy and other food and beverage products. A change in government regulation could adversely affect the Company. For example, certain regulators have considered developing test protocols to determine whether closures for milk bottles conform to specific regulatory requirements. There can be no assurance that federal or state authorities will not develop protocols in the future that would materially increase the Company's costs of manufacturing certain of its products. The Company's plastic closures and most of the containers for which the Company's closures are designed are made of non-biodegradable materials. Federal, state and local governments may enact laws or regulations concerning environmental matters that would increase the cost of producing, or otherwise adversely affect the demand for, plastic products, including those of the Company. If widely adopted, such prohibitions and restrictions could impose substantial additional costs on the Company. Moreover, if as a result of pressure from consumers or legislative action, the packaging industry were to shift to different types of packaging materials or different styles of containers, the Company's results of operations could be adversely affected. 11 PATENT INFRINGEMENT LITIGATION The Company has recently received an adverse jury verdict in litigation brought by Scholle Corporation ("Scholle") asserting that the Company's five gallon non-spill closure product infringed upon certain of Scholle's patents. The jury verdict, if entered by the court, would hold the Company liable for damages in the amount of $0.01 per closure. For the period beginning January 1992, when the product was introduced, through May 31, 1995, such damages would be approximately $800,000, which amount the Company has accrued in its financial statements. In addition, the Company incurred during this period legal fees and other legal expenses of approximately $1.5 million in connection with the Scholle litigation. The Company's total sales of the product involved in the litigation were $4.0 million during the twelve month period ended May 31, 1995. The Company is continuing to produce and sell the product and accrue damages in the amount of $0.01 per closure. There is a risk that Scholle may seek to enjoin the Company from producing and selling the product in the future and may seek to recover damages in excess of $0.01 per closure (up to $0.03 per closure) for sales of the product after May 31, 1995. If such an injunction were granted, or if the Company were required to pay treble damages (thereby substantially reducing or eliminating the Company's profit on the product in question), the Company anticipates that it would change its five gallon non-spill product to a design that the Company believes will not infringe upon any Scholle patent, although it can be anticipated that additional tooling costs will be incurred and market disruption may result from changing to the new product design. See "Business -- Litigation." In addition, there can be no assurance that other infringement litigation will not be brought in the future against the Company, that any such litigation will not be expensive and protracted or that, as a result of such litigation, the Company will not be required to terminate a business practice or seek to obtain a license to the intellectual property of others. LIMITED PROTECTION OF INTELLECTUAL PROPERTY The Company has a number of patents covering various aspects of the design and construction of its products. The Company believes that protection afforded by its patents is less significant to its future success than factors such as the knowledge, ability and experience of its personnel, new product development, product enhancements and ongoing customer service. There can be no assurance that the Company's patents will withstand challenge in litigation, and patents do not ensure that competitors will not develop competing products or infringe upon the Company's patents. The Company now markets its products internationally, and the protection offered by the patent laws of foreign countries may be less than the protection offered by the United States patent laws. The Company also relies on trade secrets and know-how to maintain its competitive position. While the Company enters into confidentiality agreements with employees and consultants who have access to proprietary information, there can be no assurance that these measures will prevent the unauthorized disclosure or use of such trade secrets and know-how. POSSIBLE ADVERSE EFFECT OF CHANGES IN RESIN PRICES The Company's products are molded from various plastic materials, primarily low density polyethylene ("LDPE") resin. LDPE resin accounts for approximately 30% of the Company's cost of sales for closures. Plastic resins, including LDPE, are subject to substantial price fluctuations, resulting from shortages in supply, changes in the prices of natural gas, crude oil and other petrochemical products from which resins are produced and other factors. Significant increases in resin prices, coupled with an inability to promptly pass such increases on to customers, would have a material adverse effect on the Company's financial condition and results of operations. Moreover, even if the full amount of such price increases are passed on to customers, the increases would have the effect of reducing gross margins. Similarly, if resin prices decrease, customers would typically expect rapid pass-through of the decrease, and there can be no assurance that the Company would be able to maintain its margins. See "Business - -- Raw Materials and Production." 12 UNCERTAINTY WITH RESPECT TO NEW PRODUCTS AND MARKETS The Company believes that the domestic markets for its traditional products have become relatively mature and that, in order to continue to grow in a manner consistent with recent results, the Company will increasingly rely on new products, such as the fitment and 28mm push-pull cap, as well as expansion into international markets. Developing new products and expanding into new markets will require a substantial investment and involve additional risks, and there can be no assurance that the Company's efforts to achieve such development and expansion will be successful. The Company's international operations are subject to certain risks associated with doing business in foreign countries, including the possibility of adverse governmental regulation, additional taxation and exchange rate fluctuations. Having recently acquired two bottle manufacturing companies in Canada, the Company is now embarking upon the plastic bottle manufacturing and distribution business in western Canada, a business in which the Company has not previously engaged, and one that may present new and unanticipated challenges. There can be no assurance that the Canadian operations will be successful or will not require additional funding. Since the Company's Canadian operations will be conducted through an Unrestricted Subsidiary, the Indenture will impose significant limitations upon the Company's ability to fund those operations. DEPENDENCE UPON MANAGEMENT The Company's success depends in part on certain key management employees. If, for any reason, such key personnel do not continue to be active in the Company's management, operations could be adversely affected. See "Management -- Executive Officers and Directors." INTEREST OF UNDERWRITER'S AFFILIATE IN SALE OF NOTES A portion of the net proceeds from the sale of the Notes is being used to redeem existing subordinated indebtedness of the Company in the principal amount of $10.0 million, plus an applicable prepayment premium ($613,000 at May 31, 1995). This subordinated indebtedness is held by The Chase Manhattan Bank, N.A., an affiliate of Chase Securities, Inc. (one of the Underwriters). Chase Manhattan Capital Corporation, which is also an affiliate of Chase Securities, Inc., holds, together with related parties, approximately 20% of the Company's outstanding voting capital stock. See "Certain Transactions," "Principal Stockholders" and "Underwriting." LIMITATIONS ON REPURCHASE OF NOTES Upon a Change of Control (as defined), each holder of Notes will have certain rights to require the Company to repurchase all or a portion of such holder's Notes. If a Change of Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the repurchase price for all Notes tendered by the holders thereof. In addition, a Change of Control would constitute a default under the New Credit Facility and, since indebtedness under the New Credit Facility will effectively rank senior in priority to indebtedness under the Notes, the Company would be obligated to repay indebtedness under the New Credit Facility in advance of indebtedness under the Notes. See "Effective Subordination of Notes in Certain Circumstances." The Company's repurchase of Notes as a result of the occurrence of a Change of Control may be prohibited or limited by, or create an event of default under, the terms of other agreements relating to borrowings which the Company may enter into from time to time, including agreements relating to secured indebtedness. Failure by the Company to make or consummate a Change of Control offer would constitute an immediate Event of Default under the Indenture, thereby entitling the Trustee or holders of at least 25% in principal amount of the then outstanding Notes to declare all of the Notes to be due and payable immediately; provided that so long as any indebtedness permitted to be incurred pursuant to the New Credit Facility is outstanding, such acceleration shall not be effective until the earlier of (i) an acceleration of any such indebtedness under the New Credit Facility or (ii) five business days after receipt by the Company of written notice of such acceleration. In the event all of the Notes are declared due and payable, the Company's ability to repay the Notes would be subject to the limitations referred to above. See "Description of the Notes -- Repurchase at Option of Holders -- Change of Control." 13 ABSENCE OF PUBLIC MARKET There has been no prior market for the Notes, and there can be no assurance that a market will develop. The Company does not intend to apply for listing of the Notes on any national securities exchange or for quotation of the Notes through the National Association of Securities Dealers Automated Quotation System ("Nasdaq"). The Company has been advised by the Underwriters that, following the completion of the Offering, the Underwriters presently intend to make a market in the Notes; however, they are under no obligation to do so and may discontinue any market-making activities at any time without notice. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities, the performance of the Company and other factors. USE OF PROCEEDS The Company intends to use the net proceeds from the sale of the Notes offered hereby, estimated to be $106.1 million (after deducting approximately $3.9 million in underwriting discount and other estimated offering expenses), (i) to repay all outstanding indebtedness under the Company's current revolving credit facilities (the "Current Revolving Credit Facility") and under its term loans (the "Current Term Loan Facility" and, together with the Current Revolving Credit Facility, the "Current Credit Facility") in the aggregate amount of $72.1 million and (ii) to redeem existing subordinated indebtedness (the "Senior Subordinated Notes") in the amount of $10.0 million, plus an applicable prepayment premium ($613,000 at May 31, 1995). The balance of the net proceeds will be available for working capital and general corporate purposes, including capital expenditures and the possible purchase of certain facilities currently leased (as well as certain real property adjacent thereto) by the Company. At May 31, 1995, the weighted average interest rate on the Current Revolving Credit Facility was 9.55% per annum, and the weighted average interest rate on the Current Term Loan Facility was 9.57% per annum. Availability under the Current Revolving Credit Facility expires no earlier than July 1, 1999. At May 31, 1995, the Company had drawn $14.4 million against the Current Revolving Credit Facility and had the ability to draw up to an additional $3.6 million. The Current Term Loan Facility requires quarterly principal payments through July 1, 2001. The Senior Subordinated Notes bear interest at 13.5% per annum and are due June 30, 2002. See "Certain Transactions," "Principal Stockholders" and "Underwriting." 14 CAPITALIZATION The following table sets forth the historical current portion of long-term debt and capitalization of the Company as of May 31, 1995 and the as adjusted capitalization of the Company as of such date after giving effect to the sale of the Notes and the application of net proceeds to repay certain indebtedness. See "Use of Proceeds." The table should be read in conjunction with the "Unaudited Pro Forma As Adjusted Combined Consolidated Financial Data" and the historical financial statements and related notes thereto of the Company included elsewhere in this Prospectus.
AS OF MAY 31, 1995 ---------------------------- HISTORICAL AS ADJUSTED(A) ----------- --------------- (IN THOUSANDS) Current portion of long-term debt.................................................... $ 3,851 $ 101 ----------- --------------- ----------- --------------- Long-term debt, excluding current portion: Current Revolving Credit Facility.................................................. $ 14,388 $ -- Current Term Loan Facility......................................................... 54,000 -- New Credit Facility (b)............................................................ -- -- 10 3/4% Senior Notes due 2005...................................................... -- 110,000 Senior Subordinated Notes.......................................................... 10,000 -- Note payable....................................................................... 96 96 ----------- --------------- Total long-term debt, excluding current portion.................................. 78,484 110,096 Redeemable warrants (c).............................................................. 3,512 3,512 Class A Common Stock, $.001 par value; 2,503,000 shares authorized; no shares issued and outstanding..................................................................... -- -- Class B Common Stock, $.001 par value; 20,285,715 shares authorized; 11,343,762 shares issued and outstanding....................................................... 11 11 Additional paid-in-capital........................................................... 7,418 7,418 Notes receivable from shareholders................................................... (271) (271) Accumulated deficit (d).............................................................. (1,763) (3,300) ----------- --------------- Total shareholders' equity....................................................... 5,395 3,858 ----------- --------------- Total capitalization........................................................... $ 87,391 $ 117,466 ----------- --------------- ----------- ---------------
- ------------------------ (a) Does not include pro forma adjustments to give effect to the Canadian Acquisition. For information as to such adjustments, see "Unaudited Pro Forma As Adjusted Condensed Consolidated Financial Data -- Pro Forma As Adjusted Condensed Consolidated Balance Sheet." (b) Concurrently with the sale of the Notes, the Company will enter into the New Credit Facility under which the Company will have the ability to draw up to $35.0 million of senior secured indebtedness, subject to a borrowing base and certain other restrictions. As of May 31, 1995, after giving effect to the sale of the Notes offered hereby and the application of net proceeds to repay certain indebtedness, the Company would have had the ability to draw up to $23.7 million under the New Credit Facility. The New Credit Facility will have a term of five years and will bear interest at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.25% or the Base Rate plus 1.25%. For additional information on the New Credit Facility, see "Description of the New Credit Facility." (c) The redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company's common stock. If the Company does not complete an initial public offering of its common stock by June 30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the holders may require the Company to repurchase the warrants. (d) Accumulated deficit on an as adjusted basis has been increased to reflect prepayment premiums and write-off of deferred financing costs associated with the repayment of the Company's existing Senior Subordinated Notes and write-off of deferred financing costs associated with the repayment of the Current Revolving Credit Facility and the Current Term Loan Facility, all of which will be accounted for as an extraordinary loss on early extinguishment of debt. 15 UNAUDITED PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED FINANCIAL DATA The following unaudited pro forma as adjusted condensed consolidated financial data has been derived by making certain pro forma adjustments and other adjustments to the financial statements of the Company. The unaudited pro forma as adjusted condensed consolidated statement of operations data for the fiscal year ended August 31, 1994 give effect to (i) the acquisition of Nepco, (ii) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (iii) the Canadian Acquisition, as if such transactions had occurred on September 1, 1993. The unaudited pro forma as adjusted condensed consolidated statement of operations data for the nine months ended May 31, 1995 give effect to (i) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (ii) the Canadian Acquisition, as if such transactions had occurred on September 1, 1994. The unaudited pro forma as adjusted condensed consolidated balance sheet data for the nine months ended May 31, 1995 give effect to (i) the sale of the Notes and the application of the net proceeds to repay certain indebtedness and for working capital and (ii) the Canadian Acquisition, as if such transactions had occurred on such date. The unaudited pro forma and other adjustments which are described in the accompanying notes are based on available information and certain assumptions that the Company believes are reasonable. Although the unaudited pro forma as adjusted condensed consolidated financial data give effect to the Canadian Acquisition, the Company's Canadian subsidiary will be operated as an Unrestricted Subsidiary pursuant to the Indenture. As a result, amounts permitted to be invested by the Company in its Canadian subsidiary will be subject to significant limitations. See "Description of the Notes -- Restricted Payments." In addition, the Canadian subsidiary is separately financed by indebtedness that is non-recourse to the Company (except that the Company has pledged the capital stock of the Canadian subsidiary as security for the loans) and, under the terms of such indebtedness, the Canadian subsidiary is subject to significant restrictions on its ability to pay dividends or make other cash distributions or payments to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The unaudited pro forma as adjusted statements should be read in conjunction with the separate historical financial statements of the Company, the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The unaudited pro forma as adjusted statements are based on available information and certain assumptions that the Company believes are reasonable. Such statements do not purport to represent what the Company's financial position or results of operations would actually have been if the aforementioned transactions in fact had occurred on such dates or at the beginning of the period indicated or to project the Company's financial position or results of operations at any future date or for any future period. 16 PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FISCAL YEAR ENDED AUGUST 31, 1994 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
NEPCO PRO FORMA COMPANY TEN MONTHS ADJUSTMENTS COMPANY- ADJUSTMENTS COMPANY- ONLY YEAR ENDED AUGUST ENDED FOR NEPCO ONLY PRO FOR SALE OF PRO FORMA AS 31, 1994 JUNE 30, 1994 ACQUISTION FORMA NOTES ADJUSTED ----------------- --------------- -------------- ----------- -------------- ------------ $ 70,284 $ 31,131 $ -- $ 101,415 $ -- $ 101,415 Sales............................ 51,670 27,313 186(a) 79,169 -- 79,169 Cost of sales.................... -------- --------------- ------- ----------- ------- ------------ 18,614 3,818 (186) 22,246 -- 22,246 Gross profit................... 8,821 4,281 46(a) 12,638 -- 12,638 Selling, general and administrative.................. (510)(b) 764 142 -- 906 -- 906 Research and development......... 2,025 5 890(c) 3,527 -- 3,527 Amortization of intangibles...... 607(d) -------- --------------- ------- ----------- ------- ------------ 7,004 (610) (1,219) 5,175 -- 5,175 Income (loss) from operations.................... 3,899 380 2,100(e) 6,605 5,299(i) 11,904 Interest (income) expense, net... 226(d) 433 -- (124)(f) 309 81(j) 390 Amortization of debt financing costs........................... 477 (236) -- 241 -- 241 Other (income) expense, net...... -------- --------------- ------- ----------- ------- ------------ 2,195 (754) (3,421) (1,980) (5,380) (7,360) Income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle.......... 1,095 (240) (1,012)(g) (157) (2,152)(k) (2,309) Income taxes (benefit)........... -------- --------------- ------- ----------- ------- ------------ $ 1,100 $ (514) $ (2,409)(h) $ (1,823) $ (3,228)(l) $ (5,051) Income (loss) before extraordinary item and cumulative effect of change in accounting principle.......... -------- --------------- ------- ----------- ------- ------------ -------- --------------- ------- ----------- ------- ------------ $ 0.08 $ (0.14) $ (0.38) Income (loss) before extraordinary item per share....................... -------- ----------- ------------ -------- ----------- ------------ CANADA PRO FORMA CONSOLIDATED TWELVE MONTHS ADJUSTMENTS COMPANY PRO ENDED FOR CANADIAN FORMA AS AUGUST 31, 1994 ACQUISITION ADJUSTED ----------------- -------------- ------------- $ 6,243 $ 107,658 Sales............................ 5,357 $ (1,408)(m) 83,503 Cost of sales.................... 385(n) ------- ------- ------------- 886 1,023 24,155 Gross profit................... 954 (745)(o) 12,847 Selling, general and administrative.................. -- 906 Research and development......... -- 240(p) 4,391 Amortization of intangibles...... 624(q) ------- ------- ------------- (68) 904 6,011 Income (loss) from operations.................... (29) 976(r) 13,055 Interest (income) expense, net... 204(q) -- -- 390 Amortization of debt financing costs........................... (76) -- 165 Other (income) expense, net...... ------- ------- ------------- 37 (276) (7,599) Income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle.......... -- (15)(s) (2,324) Income taxes (benefit)........... ------- ------- ------------- $ 37 $ (261) $ (5,275) Income (loss) before extraordinary item and cumulative effect of change in accounting principle.......... ------- ------- ------------- ------- ------- ------------- $ (0.39) Income (loss) before extraordinary item per share....................... ------------- -------------
(FOOTNOTES ON FOLLOWING PAGE) 17 NOTES TO PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE FISCAL YEAR ENDED AUGUST 31, 1994. PRO FORMA ADJUSTMENTS FOR NEPCO ACQUISITION (a) Adjusts the historical results of operations of the Company for the additional depreciation and amortization expense related to the revaluation of Nepco property, plant and equipment. A total of $186,000 additional depreciation was added to cost of sales and $46,000 was added to selling, general and administrative expense. (b) Reduces the historical compensation of former owners by $510,000 to contractual levels consistent with the noncompetition agreements described under note (d) below. (c) Increases the goodwill amortization for the period from July 1, 1994 to August 31, 1994 to the amortization for a full year assuming that the Nepco acquisition had occurred on September 1, 1993. Goodwill as of September 1, 1993 was assumed to have been $15.8 million and is amortized over a period of 15 years. (d) Adjusts the historical results of operations of the Company for the costs associated with noncompetition agreements entered into in connection with the Nepco acquisition. Includes the cost of amortization of $607,000 and effective interest cost of $226,000 related to the agreements for a full year. (e) Increases the interest expense for the Company for the year ended August 31, 1994 by $2.1 million assuming that the debt to fund the Nepco acquisition was outstanding on September 1, 1993 at a rate of 8.0%. (f) Decreases the historical amortization of loan fees of the Company based upon the elimination of historical loan fee amortization of $433,000 and inclusion of amortization expense for the debt incurred in connection with the Nepco acquisition of $309,000 for the fiscal year ended August 31, 1994. (g) Adjusts the historical tax expense of the Company for the deductible portion of adjustments described in notes (a) through (f) above, at an assumed effective tax rate of 40%. (h) Net loss for the period would be $2.9 million, $210,000 of which is attributable to the assumed increase in the write-off of historical deferred financing costs, at an assumed effective tax rate of 40%. ADJUSTMENTS FOR SALE OF NOTES (i) Assumes that the Notes offered hereby were issued September 1, 1993 at an interest rate of 10.75% and that net proceeds of the Notes were used to repay certain indebtedness. (j) Increases loan fee amortization based upon the inclusion of amortization expense for the assumed underwriting discount and offering expenses of $3.9 million related to the Notes, and net of the pro forma amortization of loan fees. (k) Adjusts the pro forma tax expense of the Company and Nepco for the tax benefit of the adjustments in notes (i) and (j) above, at an assumed effective tax rate of 40%. (l) Net loss for the period would be $7.1 million, $926,000 of which is attributable to the assumed prepayment premium as of September 1, 1993 of $1.5 million on the Senior Subordinated Notes at an assumed effective tax rate of 40%. The prepayment premium on the Senior Subordinated Notes decreases from the date of issuance and would have been $613,000 at May 31, 1995. PRO FORMA ADJUSTMENTS FOR CANADIAN ACQUISITION (m) Adjusts the historical operations results of the Company to eliminate the rental expense paid to a related party for the machinery and equipment purchased as discussed in note (n). (n) Adjusts the historical operations results of the Company for the additional depreciation and amortization expense related to the purchase of the Canadian machinery and equipment. (o) Reduces the historical compensation of the former owners by $745,000 to contractual levels. (p) Adjusts the historical results of operations of the Company for the goodwill amortization expense assuming the Canadian Acquisition had occurred on September 1, 1993. Goodwill as of September 1, 1993 was assumed to have been $6.0 million and is amortized over a period of 25 years. (q) Adjusts the historical results of operations of the Company for the costs associated with noncompetition agreements entered into in connection with the Canadian Acquisition. Includes the cost of amortization of $624,000 and effective interest costs of $204,000 related to the agreements for a full year (using a discount rate of 11%). (r) Increases the interest expense for the Company for the year ended August 31, 1994 by $976,000 assuming that the debt to finance the Canadian Acquisition was outstanding on September 1, 1993 at an annual rate of 10%. (s) Adjusts the historical tax expense of the Company for the deductible portion of adjustments described in notes (m) through (r) at an assumed effective tax rate of 40%. 18 PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) NINE MONTHS ENDED MAY 31, 1995 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA COMPANY NINE ADJUSTMENTS CANADA ADJUSTMENTS MONTHS ENDED FOR SALE OF COMPANY-ONLY AS NINE MONTHS ENDED FOR CANADIAN MAY 31, 1995 NOTES ADJUSTED MAY 31, 1995 ACQUISITION ------------- ------------- --------------- --------------------- ------------- Sales...................................... $ 86,462 $ -- $ 86,462 $ 7,502 $ -- Cost of sales.............................. 65,674 -- 65,674 6,110 (1,208)(f) 289(g) ------------- ------------- --------------- ------- ------------- Gross profit............................. 20,788 -- 20,788 1,392 919 Selling, general and administrative........ 9,973 -- 9,973 1,507 (504)(h) Research and development................... 943 -- 943 -- -- Amortization of intangibles................ 2,547 -- 2,547 -- 180(i) 468(j) ------------- ------------- --------------- ------- ------------- Income (loss) from operations............ 7,325 -- 7,325 (115) 775 Interest (income) expense, net............. 6,131 2,842(a) 8,973 (41) 732(k) 153(j) Amortization of debt financing costs....... 360 (68)(b) 292 -- -- Other (income) expense, net................ (60) -- (60) (132) -- ------------- ------------- --------------- ------- ------------- Income (loss) before income taxes and extraordinary item...................... 894 (2,774) (1,880) 58 (110) Income taxes (benefit)..................... 517 (1,110)(c) (593) -- 28(l) ------------- ------------- --------------- ------- ------------- Income (loss) before extraordinary item.................................... $ 377 $ (1,664)( (e) $ (1,287) $ 58 $ (138) ------------- ------------- --------------- ------- ------------- ------------- ------------- --------------- ------- ------------- Income (loss) before extraordinary item per share............................... $ 0.03 $ (0.09) ------------- --------------- ------------- --------------- CONSOLIDATED COMPANY PRO FORMA AS ADJUSTED ------------- Sales...................................... $ 93,964 Cost of sales.............................. 70,865 ------------- Gross profit............................. 23,099 Selling, general and administrative........ 10,976 Research and development................... 943 Amortization of intangibles................ 3,195 ------------- Income (loss) from operations............ 7,985 Interest (income) expense, net............. 9,817 Amortization of debt financing costs....... 292 Other (income) expense, net................ (192) ------------- Income (loss) before income taxes and extraordinary item...................... (1,932) Income taxes (benefit)..................... (565) ------------- Income (loss) before extraordinary item.................................... $ (1,367) ------------- ------------- Income (loss) before extraordinary item per share............................... $ (0.10) ------------- -------------
NOTES TO PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED MAY 31, 1995. ADJUSTMENTS FOR SALE OF NOTES (a) Increases interest expense, net based upon an assumed interest rate of 10.75% on the Notes offered hereby and the use of net proceeds to repay certain indebtedness. (b) Decreases historical loan fee amortization for the nine months ended May 31, 1995 for the amortization, on a pro forma basis, of assumed loan fees and underwriting discount of $3.9 million. (c) Decreases the pro forma tax expense of the Company for the tax benefit of deductible pro forma adjustments in notes (a) and (b) above, at an assumed effective tax rate of 40%. (d) Net loss for the period would be $3.3 million, $1.4 million of which is attributable to the assumed write-off of deferred financing costs of $2.4 million at an assumed effective tax rate of 40% and after giving effect to the adjustment in note (e). (e) Net loss for the period would be $3.3 million, $612,000 of which is attributable to the assumed prepayment premium of $1.0 million on the Senior Subordinated Notes at an assumed effective tax rate of 40% (after giving effect to the adjustment in note (d)). PRO FORMA ADJUSTMENTS FOR CANADIAN ACQUISITION (f) Adjusts the historical results of operations of the Company to eliminate the rental expense paid to a related party for the machinery and equipment purchased as discussed in note (g). (g) Adjusts the historical results of operations of the Company for the additional depreciation and amortization expense related to the purchase of the Canadian machinery and equipment. (h) Reduces the historical compensation of the former owners by $504,000 to contractual levels. (i) Adjusts the historical results of operations of the Company for the goodwill amortization expense assuming the Canadian Acquisition had occurred on September 1, 1994. Goodwill as of September 1, 1994 was assumed to have been $6.0 million and is amortized over a period of 25 years. (j) Adjusts the historical results of operations of the Company for the costs associated with noncompetition agreements entered into in connection with the Canadian Acquisition. Includes the cost of amortization of $468,000 and effective interest costs of $153,000, related to the agreements for the nine months (using a discount rate of 11%). (k) Increases the interest expense for the Company for the nine months ended May 31, 1995 by $732,000, assuming that the debt to finance the Canadian Acquisition was outstanding on September 1, 1994 at an annual rate of 10%. (l) Adjusts the historical tax expense of the Company for the deductible portion of adjustments described in notes (f) through (k) above, at an assumed effective tax rate of 40%. 19 PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) MAY 31, 1995 (IN THOUSANDS)
PRO FORMA ADJUSTMENTS ADJUSTMENTS FOR SALE OF COMPANY-ONLY AS CANADA MAY 31, FOR CANADIAN MAY 31, 1995 NOTES ADJUSTED 1995(C) ACQUISITION ------------- ------------ --------------- ----------------- ------------- Assets Current assets: Cash and cash equivalents................ $ 505 $ 23,349(a) $ 23,854 $ 306 $ -- Short term investments................... 1,000 -- 1,000 -- -- Accounts receivable, net................. 17,046 -- 17,046 1,327 -- Inventories.............................. 11,219 -- 11,219 602 -- Other current assets..................... 962 -- 962 74 -- Deferred income taxes.................... 731 -- 731 107 -- ------------- ------------ --------------- -------- ------------- Total current assets................... 31,463 23,349 54,812 2,416 -- Notes receivable........................... 454 -- 454 -- -- Property, plant and equipment, net......... 48,903 -- 48,903 3,581 -- Goodwill, net.............................. 15,478 -- 15,478 6,011 -- Patents, net............................... 7,979 -- 7,979 -- -- Covenants not to compete, net.............. 3,048 -- 3,048 2,496 -- Debt financing costs, net.................. 1,949 1,951(a) 3,900 123 -- Other assets............................... 3,148 -- 3,148 -- -- ------------- ------------ --------------- -------- ------------- Total assets........................... $ 112,422 $ 25,300 $ 137,722 $ 14,627 $ -- ------------- ------------ --------------- -------- ------------- ------------- ------------ --------------- -------- ------------- Liabilities, redeemable warrants and total shareholders' equity Current liabilities: Current portion of long-term debt........ $ 3,851 $ (3,750)(a) $ 101 $ 654 $ -- Accounts payable......................... 5,601 -- 5,601 830 -- Accrued liabilities...................... 6,484 (1,025)(b) 5,459 114 -- Accrued Interest......................... 751 -- 751 -- -- ------------- ------------ --------------- -------- ------------- Total current liabilities.............. 16,687 (4,775) 11,912 1,598 -- Long-term debt, less current portion....... 78,484 31,612(a) 110,096 7,994 1,107(d) Other long-term liabilities................ 2,531 -- 2,531 2,128 -- Deferred income taxes...................... 5,813 -- 5,813 -- -- ------------- ------------ --------------- -------- ------------- Total liabilities...................... 103,515 26,837 130,352 11,720 1,107 Redeemable warrants........................ 3,512 -- 3,512 -- -- Common stock............................... 11 -- 11 2,907 (2,907)(e) 1(d) Additional paid-in capital................. 7,418 -- 7,418 -- 1,799(d) Less notes receivable from shareholders.... (271) -- (271) -- -- Accumulated deficit........................ (1,763) (1,537)(b) (3,300) -- -- ------------- ------------ --------------- -------- ------------- Total shareholders' equity............. 5,395 (1,537) 3,858 2,907 (1,107) ------------- ------------ --------------- -------- ------------- Total liabilities, redeemable warrants and total shareholders' equity........ $ 112,422 $ 25,300 $ 137,722 $ 14,627 $ -- ------------- ------------ --------------- -------- ------------- ------------- ------------ --------------- -------- ------------- CONSOLIDATED COMPANY PRO FORMA AS ADJUSTED ------------- Assets Current assets: Cash and cash equivalents................ $ 24,160 Short term investments................... 1,000 Accounts receivable, net................. 18,373 Inventories.............................. 11,821 Other current assets..................... 1,036 Deferred income taxes.................... 838 ------------- Total current assets................... 57,228 Notes receivable........................... 454 Property, plant and equipment, net......... 52,484 Goodwill, net.............................. 21,489 Patents, net............................... 7,979 Covenants not to compete, net.............. 5,544 Debt financing costs, net.................. 4,023 Other assets............................... 3,148 ------------- Total assets........................... $ 152,349 ------------- ------------- Liabilities, redeemable warrants and total shareholders' equity Current liabilities: Current portion of long-term debt........ $ 755 Accounts payable......................... 6,431 Accrued liabilities...................... 5,573 Accrued Interest......................... 751 ------------- Total current liabilities.............. 13,510 Long-term debt, less current portion....... 119,197 Other long-term liabilities................ 4,659 Deferred income taxes...................... 5,813 ------------- Total liabilities...................... 143,179 Redeemable warrants........................ 3,512 Common stock............................... 12 Additional paid-in capital................. 9,217 Less notes receivable from shareholders.... (271) Accumulated deficit........................ (3,300) ------------- Total shareholders' equity............. 5,658 ------------- Total liabilities, redeemable warrants and total shareholders' equity........ $ 152,349 ------------- -------------
20 NOTES TO PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) MAY 31, 1995. ADJUSTMENTS FOR SALE OF NOTES (a) Adjusts the May 31, 1995 balance sheet of the Company for the assumed sale of the Notes offered hereby. The Company intends to use the proceeds of the sale of the Notes, net of estimated offering expenses and underwriting discount of $3.9 million, to repay certain indebtedness and for working capital as follows:
Repayment of: (IN THOUSANDS) -------------- Current Revolving Credit Facility................................... $ 14,388 Current Term Loan Facility.......................................... 57,750 Senior Subordinated Notes........................................... 10,000 -------------- Total............................................................. 82,138 Prepayment premium.................................................... 613 Working capital....................................................... 23,349 Underwriting discounts and offering expenses.......................... 3,900 -------------- Total............................................................. $ 110,000 -------------- --------------
(b) Total shareholders' equity, on an as adjusted basis, has been decreased to reflect prepayment premium and the write-off of deferred financing costs associated with the repayment of the Company's existing Senior Subordinated Notes and the write-off of deferred financing costs associated with the repayment of the Current Revolving Credit Facility and the Current Term Loan Facility, all of which will be accounted for as an extraordinary loss on early extinguishment of debt, net of applicable income tax benefits. PRO FORMA ADJUSTMENTS FOR CANADIAN ACQUISITION (c) Adjustments to the balance sheet of the Canadian subsidiary, as of June 16, 1995 (the date of the Canadian Acquisition), reflect addition of debt incurred in the Canadian Acquisition totaling $7.3 million, purchase of machinery and equipment of approximately $3.5 million and goodwill recorded of $6.0 million. In addition, an intangible asset, related to a noncompetition agreement, has been recorded for the discounted net present value of payments using an assumed discount rate of 11%. Long-term debt was increased for the initial yearly payment made upon closing, totaling $727,000. Other long-term obligations were increased by $1.8 million for the discounted three remaining payments. (d) Adjusts the historical balance sheet for the financing of the Company's equity investment into the Canadian subsidiary by sale of 450,000 shares of common stock totaling $1.8 million and borrowing under the Current Revolving Credit Facility of $1.1 million. (e) Adjustment to effect the elimination of the equity in the subsidiary. 21 SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA The selected historical condensed consolidated statement of operations and balance sheet data set forth in the table below for, and at the end of, each of the fiscal years in the five year period ended August 31, 1994 have been derived from, and are qualified by reference to, the consolidated financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected historical condensed consolidated statement of operations and balance sheet data for the nine months ended May 31, 1994 and 1995, and at May 31, 1994 and 1995, are derived from unaudited consolidated financial statements of the Company and, in the opinion of the management of the Company, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations of the interim periods. Results for the nine months ended May 31, 1994 and 1995 are not necessarily indicative of the results that may be expected for the full fiscal year. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of the Company and the accompanying notes thereto and other financial information appearing elsewhere in this Prospectus.
NINE MONTHS FISCAL YEAR ENDED AUGUST 31, ENDED MAY 31, ----------------------------------------------------- ---------------------- 1990 1991 1992 1993 1994(A) 1994(B) 1995(B) --------- --------- --------- --------- --------- ----------- --------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales.................................... $ 42,841 $ 48,204 $ 52,152 $ 58,286 $ 70,284 $ 44,624 $ 86,462 Cost of sales............................ 31,213 34,658 37,676 42,679 51,670 32,983 65,674 --------- --------- --------- --------- --------- ----------- --------- Gross profit........................... 11,628 13,546 14,476 15,607 18,614 11,641 20,788 Selling, general and administrative...... 5,071 5,522 6,046 7,207 8,821 5,526 9,973 Research and development................. 273 557 915 820 764 521 943 Amortization of intangibles (c).......... 1,307 1,440 1,421 1,400 2,025 1,054 2,547 --------- --------- --------- --------- --------- ----------- --------- Income from operations................. 4,977 6,027 6,094 6,180 7,004 4,540 7,325 Other (income) expense, net (d).......... (115) (35) 632 (62) 477 (6) (60) Interest expense, net.................... 4,586 3,888 3,147 3,044 3,899 2,464 6,131 Amortization of debt financing costs..... 460 418 365 479 433 309 360 --------- --------- --------- --------- --------- ----------- --------- Income before extraordinary item, cumulative effect of change in accounting principle and income taxes................................. 46 1,756 1,950 2,719 2,195 1,773 894 Income taxes (e)......................... 525 1,301 1,287 1,521 1,095 773 517 --------- --------- --------- --------- --------- ----------- --------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle.................. (479) 455 663 1,198 1,100 1,000 377 Extraordinary item, net (f).............. -- -- -- 889 790 -- -- Cumulative effect of change in accounting principle (e)........................... -- -- -- -- 85 85 -- --------- --------- --------- --------- --------- ----------- --------- Net income (loss)........................ ($ 479) $ 455 $ 663 $ 309 $ 225 $ 915 $ 377 --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- Net income (loss) per share.............. $ (0.04) $ 0.04 $ 0.05 $ 0.02 $ 0.02 $ 0.07 $ 0.03 --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital.......................... $ 1,683 $ 2,867 $ 2,920 $ 7,109 $ 11,049 $ 4,633 $ 14,776 Total assets............................. 39,056 40,502 44,031 50,896 110,820 54,706 112,422 Total debt............................... 33,904 30,681 30,611 38,140 77,467 35,634 82,335 Redeemable warrants (g).................. 883 1,683 2,483 2,600 3,055 2,747 3,512 Total shareholders' equity (deficit)..... (761) 2,746 2,719 2,597 5,393 3,366 5,395 CASH FLOW DATA: Net cash provided by operating activities.............................. 5,926 4,666 7,699 6,768 9,351 7,450 2,920 Net cash used in investing activities.... (2,770) (4,931) (8,947) (9,119) (38,418) (5,458) (8,989) Net cash provided by (used in) financing activities.............................. (3,556) 934 229 3,538 30,099 (2,556) 4,355 OPERATING AND OTHER DATA: Closure unit volume (in millions)........ 3,101 3,376 3,763 3,980 4,893 2,953 6,170 Closure unit volume growth (h)........... 14.1% 8.9% 11.5% 5.8% 22.9% 2.1% 108.9% EBITDA (i)............................... $ 9,923 $ 11,180 $ 11,085 $ 12,883 $ 14,728 $ 9,763 $ 16,960 Depreciation and amortization (j)........ 5,291 5,536 5,920 6,845 8,357 5,271 9,089 Capital expenditures..................... 2,782 4,204 8,089 9,564 6,159 4,212 8,247 Ratio of earnings to fixed charges (k)... 1.0x 1.4x 1.4x 1.3x 1.2x 1.6x 1.1x
(FOOTNOTES ON FOLLOWING PAGE) 22 (a) Includes ten months of operations before the Nepco acquisition on June 30, 1994 and two months of operations after the acquisition. (b) The nine months ended May 31, 1994 reflect operations before the Nepco acquisition on June 30, 1994, and the nine months ended May 31, 1995 reflect operations after the acquisition. (c) Includes amortization of patents, goodwill and covenants not to compete. (d) Other expenses include financing costs and other expenses, net. (e) The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" in the fiscal year ended August 31, 1994 and the nine months ended May 31, 1994. The cumulative effect on prior years is shown in such periods. (f) Extraordinary item refers to extinguishment of certain debt, net of income tax benefit. (g) The redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company's common stock. If the Company does not complete an initial public offering of its common stock by June 30, 1999 (for certain warrants) or August 1, 2001 (for other warrants), the holders may require the Company to repurchase the warrants at the higher of current market value or an amount computed under the warrant agreement. (h) These results reflect closure unit volume growth of the Company including Nepco after June 30, 1994. On a pro forma combined basis, the closure unit volume growth for Portola and Nepco was 11.6% and 7.1% for the fiscal year ended August 31, 1994 and the nine months ended May 31, 1995, respectively. (i) EBITDA represents, for any relevant period, income (loss) before income taxes, extraordinary item, cumulative effect of change in accounting principle, depreciation of property, plant and equipment, interest expense, net, amortization of intangible assets and non-recurring legal expenses associated with the Company's litigation with Scholle Corporation. See "Business -- Litigation." The non-recurring legal expenses associated with the Scholle Corporation litigation for the fiscal year ended August 31, 1992, 1993 and 1994 were $68,000, $275,000 and $277,000, respectively; for the nine months ended May 31, 1994 and 1995, were $255,000 and $846,000, respectively; and for the twelve months ended May 31, 1995 were $867,000. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, net income, cash flow or other measure of performance in accordance with generally accepted accounting principles. EBITDA data is included because the Company understands that such information is used by certain investors as one measure of an issuer's historical ability to service debt and because certain restrictive covenants in the Indenture will be based on the Company's EBITDA. (j) Includes amortization of debt financing costs. (k) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" represents income before provision for income taxes and fixed charges. "Fixed charges" consist of interest expense, amortization of debt financing costs and the portion of lease expense which management believes is representative of the interest component of lease expense. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was acquired in 1986 through a leveraged acquisition led by Jack L. Watts, the Company's current Chairman of the Board and Chief Executive Officer. Since the acquisition, management has focused its efforts on four principal areas: (i) continuing growth by converting new customers to its plastic closures, (ii) developing new products and improving existing products, (iii) achieving productivity improvements in its manufacturing and material handling operations and (iv) seeking strategic acquisitions, including the acquisition of Nepco and certain companies in Canada. On June 30, 1994, the Company acquired Nepco for a purchase price of $40.0 million (plus $3.6 million payable pursuant to noncompetition agreements). The acquisition has been accounted for as a purchase, and the results of Nepco's operations have been consolidated with those of the Company commencing July 1, 1994. In connection with the Nepco acquisition, the Company entered into noncompetition and bonus agreements with Nepco's two shareholders under which the Company will pay $5.0 million in the aggregate over five years, with total annual payments of $1.0 million. The noncompetition payments are conditioned on the sellers meeting the requirements of the agreements. As a result of the Nepco acquisition, Portola has derived significant cost savings through raw material purchasing and production efficiencies. With respect to raw materials, the Company has reduced costs by (i) combining the volume of its purchases with Nepco's purchases, (ii) taking advantage of Portola's purchasing relationships in making Nepco's purchases and (iii) standardizing grades of resin used by Nepco. More importantly, the Company has increased overall production efficiency through shared technology and adoption of improved manufacturing processes. Although the Company's gross margins for the nine months ended May 31, 1995 have declined from historical levels, the Company's combined gross margins have improved as compared to the pro forma combined gross margins before the acquisition. For the fiscal year ended August 31, 1994, the Company's combined gross margin on a Company-only pro forma basis was 21.9%, and for the nine months ended May 31, 1995, the Company's gross margin was 24.0%. Management is continuing to evaluate the relative strengths of the operations acquired from Nepco as compared to the Company's other manufacturing operations and plans to further develop strategies for improving production efficiency by adopting their respective strengths throughout the enterprise. On June 16, 1995, the Company consummated the Canadian Acquisition in which the Company purchased for C$14.6 million (plus C$3.4 million payable pursuant to noncompetition agreements) the 50% interest it had not previously owned in Canada Cap Snap Corporation, a British Columbia corporation engaged in manufacturing and distributing small closures in western Canada, together with all the capital stock of two affiliated plastic bottle manufacturers. In connection with the acquisition, the Company has obtained noncompetition agreements from the sellers under which its Canadian subsidiary has paid C$1.0 million and will be obligated to pay an additional C$3.0 million in annual installments over the next three years, subject to the sellers meeting the requirements of these agreements. Management anticipates that the Canadian acquisition will enable the Company to establish a position in the Canadian plastic bottle marketplace and to advance its position in the Canadian closure marketplace. Under the terms of the Indenture relating to the Notes, the Canadian operations will be operated as an Unrestricted Subsidiary and, as a result, the incurrence by the Canadian subsidiary of indebtedness that is recourse to the Company, as well as investments by the Company in the Canadian subsidiary, are subject to significant limitation. See "Description of the Notes." The Company's sales and income from operations have grown consistently since fiscal 1990. Sales have grown at a compound average annual growth rate of 22.5% from $42.8 million in fiscal 1990 to $112.1 million for the twelve months ended May 31, 1995, while income from operations has grown at a compound average annual growth rate of 15.5% from $5.0 million in fiscal 1990 to $9.9 million for the twelve months ended May 31, 1995. Sales have increased primarily as a result of the Company's ability 24 to increase market share and through new product introductions such as plastic fitments for paperboard containers and PortaPlants and product enhancements such as the snap-on, screw-off closure (the "snap-screw cap"). Traditionally, the majority of the Company's sales increases have related to closure unit volume which increased from 3.1 billion in fiscal 1990 to 8.1 billion for the twelve months ended May 31, 1995. Income from operations has increased at a rate lower than sales primarily because of changes in product mix, capacity expansions not yet fully utilized, the Nepco acquisition at the end of fiscal 1994 and the increase in amortization of intangibles. The Company is dependent on a single raw material, LDPE resin, for manufacture of many of its closure products. Plastic resins, including LDPE, are subject to significant price fluctuations. Since May 1994, resin prices increased by approximately 40%. Although the Company passed on to its customers substantially all of this price increase, and has historically been able to pass on most of the prior price increases in resin, there can be no assurance that the Company will be able to do so in the future. Significant increases in resin prices, coupled with the Company's inability to promptly pass such increases on to its customers, would have a material adverse effect on the Company's financial condition and results of operations. Moreover, even if the full amount of such price increases are passed on to customers, the increase would have the effect of reducing gross margins. Similarly, if resin prices decrease, customers would typically expect rapid pass-through of the decrease, and there can be no assurance that the Company would be able to maintain its margins. See "Risk Factors -- Possible Adverse Effect of Changes in Resin Prices." RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages of the Company's sales represented by certain income and expense items in its statement of operations.
NINE MONTHS ENDED MAY FISCAL YEAR ENDED AUGUST 31, 31, ------------------------------------- ------------------------ 1992 1993 1994 1994 1995 ----------- ----------- ----------- ----------- ----------- Sales..................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................................. 72.2 73.2 73.5 73.9 76.0 ----- ----- ----- ----- ----- Gross profit............................................ 27.8 26.8 26.5 26.1 24.0 Selling, general and administrative....................... 11.6 12.4 12.5 12.4 11.5 Research and development.................................. 1.8 1.4 1.1 1.2 1.1 Amortization of intangibles............................... 2.7 2.4 2.9 2.3 2.9 ----- ----- ----- ----- ----- Income from operations.................................. 11.7 10.6 10.0 10.2 8.5 Other (income) expense, net............................... 1.2 (0.1) 0.7 -- -- Interest expense, net..................................... 6.0 5.2 5.6 5.5 7.1 Amortization of debt financing costs...................... 0.7 0.8 0.6 0.7 0.4 ----- ----- ----- ----- ----- Income before income taxes.............................. 3.8 4.7 3.1 4.0 1.0 Income taxes.............................................. 2.5 2.6 1.6 1.8 0.6 ----- ----- ----- ----- ----- Income before extraordinary item and cumulative effect of accounting change................................... 1.3 2.1 1.5 2.2 0.4 Extraordinary item, net................................... -- 1.6 1.1 -- -- Cumulative effect of accounting change................ -- -- 0.1 0.1 -- ----- ----- ----- ----- ----- Net income.............................................. 1.3% 0.5% 0.3% 2.1% 0.4% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NINE MONTHS ENDED MAY 31, 1995 COMPARED TO NINE MONTHS ENDED MAY 31, 1994 Sales increased $41.9 million, or 93.8%, from $44.6 million for the nine months ended May 31, 1994 to $86.5 million for the nine months ended May 31, 1995. Of the increase, $34.6 million was attributable to sales from Nepco operations acquired by the Company. Of the remainder, $3.0 million was attributable to an increase in equipment sales, primarily due to international sales of PortaPlants and, to a lesser 25 extent, sales of equipment to attach fitments to gable-top paperboard containers, $2.4 million resulted from closure price increases primarily driven by higher resin costs and $1.9 million was due to increased unit sales of five gallon and widemouth closures. Gross profit increased $9.2 million, or 78.6%, to $20.8 million for the nine months ended May 31, 1995, as compared to $11.6 million for the nine months ended May 31, 1994. Gross profit as a percentage of sales decreased from 26.1% for the nine months ended May 31, 1994 to 24.0% for the nine months ended May 31, 1995. The absolute increase in gross profit was primarily due to the Nepco acquisition and to a lesser extent, to increased sales of other closure products. Of the 2.1% decline in gross profit margins, 1.0% was due to the increased sales of lower-margin equipment and Nepco closures. The balance was primarily due to the increases in resin costs that, although offset by price increases in approximately the same amounts, had the effect of decreasing gross profit margins. Selling, general and administrative expense increased $4.5 million, or 80.5%, to $10.0 million for the nine months ended May 31, 1995, as compared to $5.5 million for the nine months ended May 31, 1994, and decreased as a percentage of sales from 12.4% of sales for the nine months ended May 31, 1994 to 11.5% for the nine months ended May 31, 1995. Of the absolute increase, $2.4 million was due to the selling expenses at Nepco, $1.0 million represented increased general and administrative expenses due primarily to staffing increases to support the larger corporation and $694,000 was due to increased legal expenses primarily associated with the Scholle patent infringement lawsuit. Excluding the legal expenses associated with the Scholle litigation, selling, general and administrative expense would have accounted for 10.7% of sales for the nine months ended May 31, 1995, as compared to 12.4% for the nine months ended May 31, 1994. Research and development expense increased $422,000, or 81.0%, to $943,000 for the nine months ended May 31, 1995, as compared to $521,000 for the nine months ended May 31, 1994, but decreased slightly as a percentage of sales from 1.2% for the nine months ended May 31, 1994 to 1.1% for the nine months ended May 31, 1995. Of the absolute increase in research and development expense, $278,000 was due primarily to increased staffing, $112,000 represented increased expenditures for new product prototypes and $74,000 was the result of higher patent application expenses. Amortization of intangibles (consisting of amortization of patents, goodwill and covenants not to compete) increased $1.5 million, or 141.7%, to $2.5 million for the nine months ended May 31, 1995, as compared to $1.0 million for the nine months ended May 31, 1994. Of the increase, $825,000 was due to goodwill amortization resulting from the Nepco acquisition and related financing activities, $567,000 was due to amortization of non-compete payments related to the acquisition of Nepco and $100,000 was due to the restatement of certain patent assets in connection with the adoption of Statement of Financial Accounting Standards No. 109, Accounting For Income Taxes ("SFAS 109"). Income from operations increased $2.8 million, or 61.3%, to $7.3 million for the nine months ended May 31, 1995, as compared to $4.5 million for the nine months ended May 31, 1994, but decreased as a percentage of sales from 10.2% for the nine months ended May 31, 1994 to 8.5% for the nine months ended May 31, 1995. These changes were due to the factors summarized above. Other (income) expense, net improved $54,000 to income of $60,000 for the nine months ended May 31, 1995, as compared to income of $6,000 for the nine months ended May 31, 1994. Interest expense, net increased $3.6 million, or 148.8%, to $6.1 million for the nine months ended May 31, 1995, as compared to $2.5 million for the nine months ended May 31, 1994, primarily as a result of increased borrowings to fund the Nepco acquisition and higher working capital requirements associated with increased sales levels. Income taxes decreased $256,000 to $517,000 for the nine months ended May 31, 1995, as compared to $773,000 for the nine months ended May 31, 1994. Amortization of debt financing costs increased $51,000 to $360,000 for the nine months ended May 31, 1995, as compared to $309,000 for the nine months ended May 31, 1994. 26 Income before cumulative effect of change in accounting principle decreased $623,000 to $377,000 for the nine months ended May 31, 1995, as compared to $1.0 million for the nine months ended May 31, 1994. Net income decreased by $538,000 to $377,000 for the nine months ended May 31, 1995, as compared to $915,000 for the nine months ended May 31, 1994. During fiscal 1994, the Company adopted SFAS 109, which resulted in a cumulative charge against earnings of $85,000. FISCAL YEAR ENDED AUGUST 31, 1994 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1993 Sales increased $12.0 million, or 20.6%, to $70.3 million for fiscal 1994, as compared to $58.3 million for fiscal 1993. Of the increase, $7.3 million was attributable to the Nepco acquisition on June 30, 1994 and represents Nepco's sales from closing to the end of the fiscal year. Of the $4.7 million remainder, $1.9 million was attributable to an increase in equipment sales, primarily due to international sales of PortaPlants and equipment to attach fitments to gable-top paperboard containers, $1.7 million was due to increased sales of five gallon closures and $693,000 resulted from increased sales of small closures, with a shift in product mix from the snap cap to the new snap-screw cap. Gross profit increased $3.0 million, or 19.3%, to $18.6 million for fiscal 1994, as compared to $15.6 million for fiscal 1993. Gross profit as a percent of sales decreased from 26.8% for fiscal 1993 to 26.5% for fiscal 1994. The absolute increase in gross profit was primarily due to the increase in sales volume. The modest decline in gross margins was primarily due to increased depreciation and rent expenses principally associated with opening the new Batavia, Illinois plant at the beginning of fiscal 1994. Selling, general and administrative expense increased $1.6 million, or 22.4%, to $8.8 million for fiscal 1994, as compared to $7.2 million for fiscal 1993, and increased as a percentage of sales from 12.4% in fiscal 1993 to 12.5% in fiscal 1994. While selling expenses increased $550,000, they declined from 7.8% of sales in fiscal 1993 to 7.3% in fiscal 1994 primarily because promotional equipment expenses were reduced by $400,000 in fiscal 1994. General and administrative expenses increased $1.2 million, with the increases primarily due to the inclusion of Nepco for the last two months of fiscal 1994, bonus and profit-sharing accruals and audit fee accruals. Research and development expense decreased $56,000, or 6.8%, to $764,000 for fiscal 1994 as compared to $820,000 for fiscal 1993 and decreased as a percentage of sales from 1.4% in fiscal 1993 to 1.1% in fiscal 1994. The decreases were primarily attributable to the allocation of research and development personnel to operations for work on current product enhancement projects. Amortization of intangibles increased $625,000, or 44.6%, to $2.0 million in fiscal 1994 from $1.4 million in fiscal 1993. Of the increase, $342,000 was due to the write-up of certain patent assets in fiscal 1994 in connection with the adoption of SFAS 109, $121,000 was due to amortization of non-compete payments and $162,000 was due to goodwill amortization in fiscal 1994 resulting from the Nepco acquisition and related financing activities. There was no amortization of goodwill in fiscal 1993. Income from operations increased $824,000, or 13.3%, to $7.0 million for fiscal 1994, as compared to $6.2 million for fiscal 1993, and declined slightly from 10.6% of sales in 1993 to 10.0% of sales in fiscal 1994. These changes were due to the factors summarized above. Other (income) expense, net increased $539,000 to expense of $477,000 in fiscal 1994 as compared to income of $62,000 in fiscal 1993, primarily due to fiscal 1994 write-offs totaling $625,000 as a result of financing activities that were postponed. Interest expense, net increased $855,000, or 28.1%, to $3.9 million in fiscal 1994 from $3.0 million in fiscal 1993, due to the Company incurring $39.1 million of additional debt primarily to fund the Nepco acquisition. Income taxes decreased $426,000 to $1.1 million in fiscal 1994 as compared to $1.5 million in fiscal 1993. Amortization of debt financing costs decreased $46,000 to $433,000 in fiscal 1994, as compared to $479,000 in fiscal 1993. 27 Income before extraordinary item and cumulative effect of change in accounting principle decreased $98,000 to $1.1 million in fiscal 1994 as compared to $1.2 million in fiscal 1993. Net income decreased $84,000 to $225,000 in fiscal 1994 as compared to $309,000 in fiscal 1993. In connection with the early extinguishment of debt, loan fees and other costs were expensed, resulting in an extraordinary charge for fiscal 1994 of $790,000 net of taxes. In October 1992, the Company refinanced its debt to provide additional capacity for growth, resulting in an extraordinary charge for fiscal 1993 of $889,000 net of taxes. During fiscal 1994, the Company adopted SFAS 109, which resulted in a cumulative charge against earnings of $85,000. FISCAL YEAR ENDED AUGUST 31, 1993 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1992 Sales increased $6.1 million, or 11.8%, to $58.3 million for fiscal 1993, as compared to $52.2 million for fiscal 1992. Of the increase, $2.9 million was attributable to an increase in sales of small closures primarily resulting from the conversion of new customers to the Company's snap-screw cap; $1.2 million represented an increase in sales of five gallon closures; $910,000 represented an increase in equipment sales, primarily due to international sales of PortaPlants; and $871,000 was due to an increase in sales of a newly introduced widemouth closure. Gross profit increased $1.1 million, or 7.8%, to $15.6 million for fiscal 1993, as compared to $14.5 million for fiscal 1992. Gross profit as a percentage of sales decreased from 27.8% in fiscal 1992 to 26.8% in fiscal 1993. Of the increase, $1.7 million was attributable to the increase in sales and $295,000 resulted from a reduction in repair and maintenance expenses. The increase was partially offset by $1.0 million in higher depreciation charges resulting from the capital investment program initiated in 1992 and continued through 1993. Selling, general and administrative expense increased $1.2 million, or 19.2%, to $7.2 million for fiscal 1993, as compared to $6.0 million for fiscal 1992, and increased as a percentage of sales from 11.6% in fiscal 1992 to 12.4% in fiscal 1993. Of the increase, $385,000 was attributable to increased commissions due to higher sales, $351,000 was the result of increased legal expenses primarily related to patent infringement lawsuits and $304,000 was due to greater expenditures for international travel and trade shows as the Company increased promotion of its product lines overseas. Research and development expense decreased $95,000, or 10.4%, to $820,000 for fiscal 1993, as compared to $915,000 for fiscal 1992, and decreased as a percentage of sales from 1.8% in fiscal 1992 to 1.4% in fiscal 1993. The decreases were primarily attributable to reduced outside consulting on new product design and a reduction in new product prototype costs. Amortization of intangibles (consisting primarily of amortization of patents) decreased $21,000 to $1,400,000 in fiscal 1994 from $1,421,000 in fiscal 1993. Income from operations increased $86,000, or 1.4%, to $6.2 million for fiscal 1993, as compared to $6.1 million for fiscal 1992, and decreased as a percentage of sales from 11.7% in fiscal 1992 to 10.6% in fiscal 1993. The absolute increase was primarily the result of higher sales levels, and the decrease as a percentage of sales was caused primarily by increases in depreciation and selling, general and administrative expense. Other (income) expense, net improved $694,000 to income of $62,000 for fiscal 1993, as compared to expense of $632,000 for fiscal 1992, with the improvement attributable to write-off of financing expenses in the prior year. Interest expense, net decreased $103,000 to $3.0 million for fiscal 1993, primarily as a result of declining interest rates. Amortization of debt financing costs increased $114,000 to $479,000 for fiscal 1993. Income taxes increased $234,000 to $1.5 million for fiscal 1993. Income before extraordinary item increased $535,000 to $1.2 million for fiscal 1993, as compared to $663,000 for fiscal 1992. Net income decreased $354,000 to $309,000 for fiscal 1993, as compared to $663,000 for fiscal 1992. An extraordinary item of $889,000, net of an income tax benefit of $592,000, was recorded in fiscal 1993 to reflect fees and expenses associated with extinguishment of debt. 28 LIQUIDITY AND CAPITAL RESOURCES The Company has relied primarily upon cash from operations, supplemented as necessary from time to time by borrowings from financial institutions and sales of common stock, to finance its operations, repay long-term indebtedness and fund capital expenditures and acquisitions. At August 31, 1994, the Company had cash and cash equivalents of $2.2 million, an increase of $1.0 million over 1993. Cash provided by operating activities totaled $9.4 million in fiscal 1994 and $6.1 million in fiscal 1993. For the nine months ended May 31, 1995, cash provided from operating activities was $2.9 million. At May 31, 1995, the Company's total indebtedness of $82.3 million included $14.4 million under the Current Revolving Credit Facility and $57.7 million under the Current Term Loan Facility. The Current Credit Facility was established by the Company on June 30, 1994 to fund the acquisition of Nepco and to provide capital for operations. Additionally, in conjunction with the Nepco acquisition, the Company sold 800,000 shares of Class B Common Stock, Series 1, for proceeds of $3.0 million. The Current Credit Facility bears interest based on LIBOR or the highest prime rate of selected reference banks, plus a specified margin, and is subject to an agreement under which the loans are secured by a senior security interest in substantially all the Company's assets. At May 31, 1995, the Company also had outstanding $10.0 million of Senior Subordinated Notes, as well as $197,000 in additional notes. The Senior Subordinated Notes, which were issued in 1988, are subject to a prepayment premium if repaid before June 30, 1996. The estimated prepayment premium at May 31, 1995 was approximately $613,000. Approximately $82.8 million of the net proceeds of the Notes offering will be used to repay in full the Current Credit Facility and the Senior Subordinated Notes. Concurrently with the offering, the Company will enter into the New Credit Facility which consists of a five year, senior secured revolving credit facility of up to $35.0 million, subject to a borrowing base and certain other restrictions. As of May 31, 1995, after giving effect to the sale of the Notes offered hereby and the application of net proceeds to repay certain indebtedness, the Company would have had the ability to draw up to $23.7 million under the New Credit Facility. The New Credit Facility will bear interest at floating rates based on, at the Company's option, either a base rate or LIBOR plus, in each case, a specified margin. The New Credit Facility will contain covenants and provisions that will restrict, among other things, the Company's ability to: (i) incur additional indebtedness; (ii) incur liens on its property; (iii) make investments; (iv) enter into guarantees and other contingent obligations; (v) merge or consolidate with or acquire another person or engage in other fundamental changes; (vi) engage in certain sales of assets; (vii) engage in certain transactions with affiliates; and (viii) make restricted junior payments. The New Credit Facility will also require maintenance of a specified ratio of indebtedness to consolidated cash flow on a trailing twelve month basis, and will require the repayment of loans under the New Credit Facility with proceeds of certain sales of assets. See "Description of the New Credit Facility." In June 1995, the Company established credit facilities to finance approximately C$11.6 million of the C$15.6 million required at closing to finance the Canadian Acquisition. The Company made an equity investment of C$4.0 million to finance the balance of the purchase. The Company raised $1.8 million of this investment (C$2.5 million) from the sale of 450,000 shares of Class B Common Stock, Series 1. The credit facilities are secured by assets of the Canadian subsidiary, which was formed by the amalgamation of a wholly-owned subsidiary of the Company, Canada Cap Snap Corporation, and the two bottle manufacturing companies. The facilities are non-recourse to the Company except that the Company has pledged the capital stock of the Canadian subsidiary as security for the loans. These credit facilities prohibit the Canadian subsidiary from paying dividends or making other cash distributions to the Company unless certain financial covenants are satisfied. In addition, the credit facilities limit the amount of any such dividends or distributions to an amount not to exceed advances (including advances in the form of debt) previously made by the Company to the Canadian subsidiary. The credit facilities also require the Canadian subsidiary to apply a substantial portion of its annual "excess cash flow" (as defined in the credit facilities) to repay amounts outstanding under the credit facilities. In light of these restrictions, it is possible that no dividends or other distributions will be paid by the Canadian subsidiary to the Company for the foreseeable future. The Canadian subsidiary will be operated as an 29 Unrestricted Subsidiary pursuant to the Indenture and, accordingly, amounts that may be invested by the Company in its Canadian subsidiary are subject to limitations. See "Description of the Notes -- Restricted Payments." The manufacture of plastic closures is a capital-intensive business, and the Company has traditionally made substantial capital expenditures. Beginning in fiscal 1992, the Company implemented a capital investment program to invest in cost reduction and productivity improving equipment and to build the capacity necessary for new product introductions. Capital expenditures were $8.1 million in fiscal 1992, $9.6 million in fiscal 1993 and $6.2 million in fiscal 1994. During fiscal 1992, $6.0 million was spent for additional injection molding machines, new product molds and decorating equipment, and an expansion of the Kingsport, Tennessee plant. In fiscal 1993, $6.1 million was spent for additional injection molding machines and molds, plus leasehold improvements for the new plant in Batavia, Illinois. In fiscal 1994, $2.0 million was spent for new product production molds and to complete the construction of a new plant in Bettendorf, Iowa, acquired as part of the acquisition of Nepco. The balance of the capital expenditures in each year were primarily for sustaining investments, including the replacement of worn-out tooling, amounting to $2.1 million, $3.5 million and $4.2 million for fiscal 1992, fiscal 1993 and fiscal 1994, respectively. Capital expenditures have been higher than historic levels following the Nepco acquisition as the Company now operates ten plants in the United States compared to four before the acquisition. Capital expenditures were $8.2 million for the first nine months of fiscal 1995, consisting primarily of $2.8 million in sustaining capital expenditures and $5.4 million in capacity additions for new products, principally fitments and push-pull closures. The Company anticipates that, for fiscal 1995 and fiscal 1996, capital expenditures will be approximately $9 million and $15 million, respectively. Of the capital budget for fiscal 1996, approximately $10 million has been allocated for discretionary projects. Capital expenditures for the Company's Canadian subsidiary are expected to be funded entirely from the operations and non-recourse borrowings of that subsidiary. Routine capital expenditures for the Canadian subsidiary are expected to be approximately C$1.0 million to C$1.5 million in the ordinary course, although the amount of such expenditures could increase due to unforeseen contingencies. In addition to the Company's future capital expenditure requirements, the Company is also subject to certain future obligations regarding noncompetition and bonus arrangements arising in connection with certain acquisitions. As part of the Nepco acquisition, the Company agreed to make payments under noncompetition and bonus arrangements with certain former Nepco stockholders of $800,000 and $200,000, respectively, per annum (plus an additional amount representing the difference between the federal ordinary income tax rate and the capital gains tax rate) for a period of five years following the acquisition, subject to the stockholders satisfying their respective obligations under such arrangements. As of May 31, 1995, the Company had paid a total of $669,600 pursuant to these arrangements. Moreover, as part of the Canadian Acquisition, the Company's Canadian subsidiary agreed pursuant to noncompetition agreements to pay certain former principal stockholders of such businesses a total of C$4.0 million of which C$1.0 million was paid at closing and up to an additional C$3.0 million will be paid through June 1998, subject to the stockholders satisfying their respective obligations under such agreements. The Company has recently received an adverse jury verdict in litigation brought by Scholle asserting that certain of Scholle's patents are infringed upon by the Company's five gallon non-spill closure product, a product which the Company introduced in January 1992 and continues to produce and sell. The jury verdict, if entered by the court, would hold the Company liable for damages in the amount of $0.01 per closure, and there is a risk that Scholle may seek and be awarded treble damages on closure sales after May 31, 1995. The Company has accrued damages of $800,000, at the rate of $0.01 per closure, from January 1992 through May 31, 1995, which includes approximately $450,000 during the twelve months ended May 31, 1995. Should Scholle seek and obtain an award of treble damages, or an injunction prohibiting further sales of the product in question, the Company anticipates that it would introduce an alternative product that it believes will not infringe upon the Scholle patents, thereby terminating further liability for damages. Although the introduction of the new product may entail 30 additional tooling costs and marketing costs, the Company does not anticipate that these costs or payment of the damages that may be awarded in the litigation will have a material adverse impact upon the Company's liquidity. See "Risk Factors -- Patent Infringement Litigation." The Company would have had a deficiency of earnings to fixed charges for the fiscal year ended August 31, 1994 of $10.8 million on an as adjusted pro forma basis giving effect to (i) the Nepco acquisition, (ii) the sale of the Notes and the application of net proceeds to repay certain indebtedness and (iii) the Canadian Acquisition, as if those transactions had occurred at the beginning of the period. Management has worked to successfully integrate Nepco with the Company's operations in fiscal 1995, and the deficiency of earnings to fixed charges declined to $5.3 million for the nine months ended May 31, 1995 as adjusted for (i) the sale of the Notes and application of net proceeds to repay certain indebtedness and (ii) the Canadian Acquisition, as if those transactions had occurred at the beginning of the period. A substantial portion of these deficiencies results from the non-cash amortization of intangibles, amounting to $4.4 million and $3.2 million for the pro forma as adjusted fiscal 1994, and the pro forma as adjusted nine months ended May 31, 1995, respectively. In the future, management plans to address any continuing deficiency of earnings to fixed charges through continued attention to cost reduction opportunities provided by the Nepco acquisition, as well as increasing sales and cash flow by emphasizing new products with significant near-term market potential. See "Business -- New Product Lines and Applications." Should the new product introductions be less successful than anticipated, the Company may elect to reduce discretionary capital expenditures, thereby improving its cash position. (As indicated above, the Company anticipates that its discretionary capital expenditures will be approximately $10.0 million for fiscal 1996.) In addition, the Company will have a significant amount of cash reserves upon the sale of the Notes, including $23.3 million of excess proceeds as well as borrowing capacity under the New Credit Facility. Management believes that cash on hand, together with anticipated cash flow from operations, net proceeds from the sale of the Notes not applied to the repayment of certain indebtedness and available capacity under the New Credit Facility, will be adequate to fund the Company's operations, debt service requirements and capital expenditures for the next several years. INFLATION Most of the Company's closures are priced based in part on the cost of the plastic resins from which they are produced. Since May 1994, resin prices have increased by approximately 40%. Historically, the Company has been able to pass on increases in resin prices directly to its customers on a timely basis. In recent years, the Company has benefited from relatively stable or declining prices for raw materials other than plastic resins. In the event significant inflationary trends were to resume, management believes that the Company would generally be able to offset the effects thereof through a combination of continuing improvements in operating efficiencies and price increases. There can be no assurance, however, that any such cost increases can continue to be passed through to the Company's customers. See "Risk Factors -- Possible Adverse Effect of Changes in Resin Prices." SEASONALITY The Company's sales and earnings reflect a seasonal pattern as a result of greater sales volumes during the summer months. For example, in fiscal 1994, on a Company-only pro forma basis, giving effect to the Nepco acquisition as if it had occurred on September 1, 1993, 44.1% of sales occurred in the first half of the fiscal year (September through February) while 55.9% of sales were generated in the second half of the fiscal year (March through August). The effect of seasonality on income from operations is more pronounced. For example, 34.3% of fiscal 1994 Company-only pro forma income from operations was generated in the first half and 65.7% was generated in the second half. INCOME TAXES Effective September 1, 1993, the Company adopted SFAS 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Prior years' financial statements were not restated to apply the provisions of SFAS No. 109; however, prior year business combinations were restated as of 31 September 1, 1993 under SFAS No. 109. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of such assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Prior to September 1, 1993, the provision for income taxes was based on income and expense included in the accompanying consolidated statements of operations. Differences between taxes so computed and taxes payable under applicable statutes and regulations were classified as deferred taxes arising from timing differences. Income tax expense does not bear a normal relationship to income before income taxes primarily due to nondeductible goodwill arising from the Nepco acquisition. RECENT ACCOUNTING PRONOUNCEMENTS During March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") which requires the Company to review for impairment long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The statement requires impairment losses to be recognized for assets that do not have realizable carrying values. SFAS 121 will be effective for the Company's fiscal year 1997. The Company has studied the implications of the statement, and, based on its initial evaluation, does not expect it to have a material impact on the Company's financial condition or results of operations. 32 BUSINESS OVERVIEW The Company is a leading designer, manufacturer and marketer of tamper evident plastic closures and related equipment used for packaging applications in dairy, fruit juice, bottled water, sports drinks, institutional food products and other non-carbonated beverage products. The Company's principal closure product lines include (i) small closures, (ii) five gallon closures and (iii) widemouth closures. Portola also designs, manufactures and supplies high speed capping equipment and complete turnkey water bottling systems, which are marketed by the Company primarily under the tradename "PortaPlant." Portola's closure products are manufactured domestically through a technologically advanced, high speed injection molding process at ten modern manufacturing facilities strategically located throughout the United States. Management believes that the Company is a leader in a majority of the markets it serves and that the Company is the sole or largest supplier of plastic closures for a majority of its customers. The Company sells over 8 billion closures annually under the names Cap Snap, Nepco, Portola and other brand names to over 3,000 customers. Most of the Company's customers have been doing business with the Company for more than ten years. The Company's products are used to cap such well known consumer products as Borden milk, Dole juices, Procter & Gamble's Sunny Delight juice drink, Poland Spring bottled water, Pepsi-Cola fountain syrups and Kraft barbecue sauce. Many features of the Company's closure products are proprietary, and Portola holds more than 50 patents on the design of container closures and compatible bottle necks. During the past decade, the plastic closure market has grown faster than the overall closure market in the United States. This growth is primarily due to the distinct advantages that plastic closures have over metal closures, including greater performance and design flexibility, the growing demand for tamper evident packaging and the comparatively lower cost and lighter weight of plastic closures, an important factor in the packaging industry, where transportation costs are a significant portion of overall product costs. Demand for plastic closures has also grown with the increased use of plastic containers and the conversion of paperboard containers to plastic containers. A 1994 study by Technomic Consultants International, an international marketing consulting firm which specializes in the food and packaging industries, indicates that the market for plastic closures in the United States grew from approximately 48% of total closures in 1990 to approximately 59% of total closures in 1993. The study also indicates that the average annual growth rate from 1993 through 1996 for plastic closures is expected to be 4.4%, while demand for metal closures during this period is expected to increase at a significantly lower rate. Since Portola was acquired from the founding family in 1986 by a group led by Jack L. Watts, the Company's current Chairman of the Board and Chief Executive Officer, the size of the Company as measured by sales and closure unit volume has increased from $26.1 million in sales and 2.1 billion in units for fiscal 1987 to $112.1 million in sales and 8.1 billion in units for the twelve months ended May 31, 1995, respectively. Mr. Watts and other members of senior management own or control 34.3%, on a fully diluted basis, of the common stock of the Company. Portola's senior management has significant experience in the plastic packaging business and an average tenure of eight years at the Company. COMPETITIVE STRENGTHS The Company believes that it has a strong competitive position attributable to a number of factors, including the following: -HIGH QUALITY, INNOVATIVE PRODUCTS. Management believes that Portola's leading position in niche product applications is in part the result of the Company's long-standing commitment to research and development. This commitment has led to innovative product development and application improvements, including closure products that incorporate tamper evident designs with tear strips and breakaway bands. These features have become accepted industry standards for food and non-carbonated beverage products. The Company has also built strong customer loyalty by devoting substantial resources to product engineering, enabling the Company to make continuing improvements in product performance, manufacturing procedures and process controls that are responsive to the specific and changing needs of its customers. 33 -STRONG REPUTATION FOR CUSTOMER SERVICE AND SUPPORT. The Company strives to maintain a high level of comprehensive customer service and support. Portola markets its products together with ongoing service and support as "total product solutions" designed to meet its customers' complete capping requirements. By focusing on both product development and "total product solutions," Portola has developed a reputation as a leader in quality and service. -LOW COST MANUFACTURING CAPABILITIES. The Company's manufacturing operations emphasize minimizing raw material and production costs. Portola believes that it is able to negotiate favorable prices from its resin suppliers due to its purchases of large volumes of LDPE resin. Portola's manufacturing facilities are strategically located throughout the country near major customer concentration areas to minimize transportation costs. With the acquisition and integration of Nepco, the Company has also derived significant cost savings through improved raw material purchasing and increased production efficiencies. BUSINESS STRATEGY The Company's primary strategy is to increase cash flow by maintaining and extending its leading position in niche product applications within the plastic closure and bottling industry. To support this strategy, the Company focuses on (i) advancing research and development and product engineering, (ii) providing dedicated customer support and total product solutions for customers, (iii) continuing to enhance low cost manufacturing capabilities, (iv) expanding sales in international markets where significant growth opportunities exist and (v) where appropriate, seeking strategic acquisitions that will strengthen the Company's competitive position. EMPHASIZING RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING. The Company is continuing its commitment to research and development, a commitment that has led to significant product innovations. These innovations include the original snap cap design and the five gallon closure, the "tear strip" feature that has become a standard tamper evident mechanism for food and non-carbonated beverage products and, more recently, an improved recloseable plastic dispensing fitment for gable-top fruit juice and milk cartons and the snap-screw cap. The Company also intends to continue its traditional emphasis on building strong customer loyalty by devoting substantial resources to product engineering in response to specific customer needs. Portola's staff of design engineers continually develops and enhances the Company's existing product lines, offering new features attractive to consumers and improved designs that enable customers to save costs in the capping process or in shipping. The Company believes that, by leveraging its design and engineering expertise and the production techniques it has developed in its traditional product areas, it will have the opportunity to expand its product lines into new product applications. EMPHASIZING CUSTOMER SUPPORT AND TOTAL PRODUCT SOLUTIONS. Portola seeks to preserve its long-term relationships with customers and attract new customers by providing superior on-time delivery and technical service and support and by marketing its products as "total product solutions." The total solution approach includes providing plastic closures designed to meet customer specifications, compatible container necks and neck inserts, capping and filling equipment and on-going service and support. CONTINUING TO ENHANCE LOW COST MANUFACTURING CAPABILITIES. The Company's operations emphasize minimizing production and raw materials purchasing costs. Portola's manufacturing facilities are strategically located throughout the country near major customer concentration areas to minimize transportation costs and are equipped with high speed injection molding machinery capable of producing up to 250 plastic closures per minute with minimal down time. The Company has a continuing productivity improvement program designed to further automate its production flow, streamline its workforce and upgrade its molds, equipment and systems. The Company believes it is able to negotiate favorable prices on LDPE resin due to the large volume of resin it purchases. The Nepco acquisition has led to further cost savings, as Nepco operations are streamlined and additional economies in purchasing are achieved. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." 34 EXPANDING SALES IN INTERNATIONAL MARKETS. The Company expects significant growth in international markets for plastic closures and capping and filling equipment, as bottled water and other non-carbonated water companies in Europe, the Far East, Latin America and elsewhere adopt more advanced packaging materials and techniques. The Company is seeking to capitalize on the opportunity for expansion into international markets through the formation of joint ventures with local bottle manufacturers and distributors, and by increasing export sales of closures and capping and filling equipment. To date, the Company has consummated the Canadian Acquisition, has purchased for approximately L900,000 the 50% interest it had not previously owned in Cap Snap (U.K.) Ltd. (the "U.K. Acquistion") and has entered into a joint venture in Mexico. See "-- New Product Lines and Applications -- Fitments" and "-- International Sales and Joint Ventures." SEEKING STRATEGIC ACQUISITIONS. Portola plans to continue its program of seeking to acquire businesses serving similar customers using proprietary product and process technology that offer opportunities to improve costs or extend the Company's product lines. Portola has realized and expects to achieve additional cost savings and synergies associated with the integration of Nepco, primarily by sharing and adopting improved technology and manufacturing processes, lowering raw material costs through volume purchasing economies, achieving marketing efficiencies and eliminating duplicative administrative and financial staff positions. Primarily as a result of these production efficiencies and cost savings, the Company's gross margins have increased. For the fiscal year ended August 31, 1994, the Company's combined gross margin on a Company-only pro forma basis was approximately 21.9%, and, for the twelve months ended May 31, 1995, the gross margin was approximately 24.8%. More recently, the Company has consummated the Canadian Acquisition and the U.K. Acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." PLASTIC CLOSURE MARKET Portola competes in the closure segment of the worldwide container packaging industry, focusing specifically on proprietary tamper evident plastic closure applications. Container closure devices have various applications with designs engineered to meet specific use requirements. Major product applications for container closures include food, beverages, toiletries and cosmetics, and drugs and pharmaceuticals. Closure design is a function of the type of container and its contents. Products which are carbonated, perishable, highly acidic or susceptible to tampering all require specialized capping applications. In many instances, it may be necessary for the container to be resealable, or it may be preferable for the contents to be dispensed through the closure without the closure being removed. Subject to these and other packaging requirements, container closures can be made from either plastic or metal. Demand for plastic closures has expanded with the increase in demand for plastic containers. Over the past several years, rigid and flexible plastic containers have experienced significant growth in market share at the expense of other materials such as glass and metal. Plastic containers have several advantages over glass and metal in that they are relatively inexpensive as well as flexible and light weight -- important factors in the transportation-sensitive packaging industry. Since the process used to produce plastic closures differs substantially from that used to produce plastic containers, many manufacturers of plastic products have focused on either closures or containers but not on both types of products. The use of plastic closures has also grown with the trend toward tamper evident packaging. A tamper evident feature is highly valued by the food and beverage market and the pharmaceutical market, and tamper evident features are experiencing growth in most segments of the closure market. While certain tamper evident devices can be incorporated into metal closures, the most sophisticated devices have been developed for plastic closures. Portola innovated the original snap-on cap design as well as the "tear strip" feature with breakaway bands for plastic closures, which provided the standard tamper evidency mechanism for the food and non-carbonated beverage industries. Historically, demand for the Company's products has been a function of population growth, increasing concerns by the public about the sanitation of packaged food and beverage products and the 35 continued increase in the use of plastic containers, as opposed to glass or metal, throughout the packaged food industry. For juice and bottled water markets, demand is also a function of seasonal climate variations, warm weather being responsible for increased consumption. See "-- Products" and "-- New Product Lines and Applications." PRODUCTS Portola designs, manufactures and markets a wide array of tamper evident plastic closures for applications in dairy, fruit juice, bottled water, sport drinks, institutional food products and other non-carbonated beverage products. The Company also designs, manufactures and markets (i) high speed capping equipment for use by its plastic closure customers in their bottling and packaging operations and (ii) complete turnkey bottling systems which it markets primarily under the name "PortaPlant." The Company's sales of plastic closures represented approximately 89%, 90% and 90% of its total sales for the fiscal year ended August 31, 1994, the nine month period ended May 31, 1995 and the twelve month period ended May 31, 1995, respectively. The following table sets forth sales for each of the Company's principal lines of plastic closure products and equipment during that period, and include sales from Nepco's operations from the date of the acquisition on June 30, 1994.
FISCAL YEAR ENDED AUGUST 31, NINE MONTHS ENDED TWELVE MONTHS ENDED MAY 31, 1994 MAY 31, 1995 1995 ------------------------------ ------------------------------ ------------------------------ SALES % OF TOTAL SALES SALES % OF TOTAL SALES SALES % OF TOTAL SALES --------- ------------------- --------- ------------------- --------- ------------------- (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) Small closures.................... $ 45,407 64.6% $ 63,744 73.7% $ 81,775 72.9% Five gallon closures.............. 8,718 12.4 7,455 8.6 10,172 9.1 Widemouth closures................ 8,408 12.0 7,004 8.1 9,382 8.4 --------- ----- --------- ----- --------- ----- Subtotal for plastic closures... 62,533 89.0 78,203 90.4 101,329 90.4 Capping equipment and PortaPlants...................... 7,486 10.6 8,034 9.3 10,485 9.4 Other............................. 265 0.4 225 0.3 308 0.2 --------- ----- --------- ----- --------- ----- Total....................... $ 70,284 100.0% $ 86,462 100.0% $ 112,122 100.0% --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
PLASTIC CLOSURES The Company's plastic closures are broadly grouped into three categories: (i) small closures used to cap blowmolded plastic bottles, (ii) five gallon closures and (iii) widemouth closures for institutional food products. The Company offers a wide variety of plastic closures under each of its principal product lines to satisfy specific market application and customer requirements. Most of the Company's plastic closures offer its snap-on feature, a design preferred by packagers because it reduces production costs and leakage. The Company's plastic closures also incorporate tear strips, breakaway bands or other visible tamper evidency, a feature that has become an industry standard for food and non-carbonated beverage products. The Company's plastic closures range in size from 28mm to 110mm, and conform with international packaging standards. The Company offers over 36 individual closure products. The Company also offers 33 standard colors, in addition to custom-blended colors, and sophisticated printing, embossing and adhesive labeling capabilities to provide product distinction for its customers. 36 The following table describes the Company's principal plastic closure product lines. PRODUCT LINE DESCRIPTION MARKET APPLICATION SELECTED CUSTOMERS - ------------------------ ---------------------------- ---------------------------- ---------------------------- Small closures Plastic closures for plastic Milk, fruit juice, bottled Procter & Gamble, Dean blowmolded bottles water and vinegar Foods, Borden, Kroger, Quality Chek'd, Winn Dixie, Safeway, Flav-O-Rich Five gallon closures Plastic closures for glass Water cooler bottles Perrier (Arrowhead, Great and plastic returnable water Bear, Deer Park, Ozarka, cooler bottles Poland Springs), Tyler Mt. (Anita Springs, Rainbow), McKesson (Alhambra, Sparkletts), Suntory (Crystal Springs), A.S. Watson Widemouth closures Plastic closures for Institutional foods Kraft, Mike Rose Foods, T. widemouth plastic containers including condiments, Marzetti, Heinz, S.E. Rykoff mayonnaise and salad dressing
CAPPING EQUIPMENT The Company also designs, manufactures and markets capping equipment for use in high speed bottling, filling and packaging production lines. A substantial majority of the Company's plastic closure customers use the Company's capping equipment. The Company's ability to supply capping equipment and technical assistance along with its plastic closures represents an important competitive advantage as customers are assured that the Company's plastic closures will be applied properly to provide leakproof seals and that any capping problems will be resolved quickly. PORTAPLANTS In addition to plastic closures and capping equipment, the Company also designs, manufactures and markets turnkey five gallon water capping and filling systems. The Company's most comprehensive five gallon water bottling system is its PortaPlant system. The PortaPlant is a compact bottle washing, filling, capping and conveying system for glass and plastic water bottles that can, depending on size, process 150 to 2,000 bottles per hour. The PortaPlant's modular design makes it ideal for new and small water bottling companies as well as established companies whose growth requires integrated expansion. Sales of PortaPlants totaled approximately $4.3 million, $4.7 million and $4.7 million in fiscal 1993, fiscal 1994 and the first nine months of fiscal 1995, respectively. Portola has focused its sales efforts for PortaPlants internationally as less developed countries look for improved distribution of safe and reliable drinking water. PRODUCT DEVELOPMENT The Company continues to be committed to product development and engineering. Its research and development group and engineering staff provide a range of design and development services, focusing primarily on (i) new products and product enhancements, (ii) tooling and molds necessary for manufacturing plastic closures and (iii) capping equipment compatible with the Company's closures and its customers' containers. Traditionally, the Company has built strong customer loyalty by devoting substantial resources to product engineering, enabling the Company to make continuing enhancements to the Company's existing product lines that improve product performance and processing in response to the customers' specific and changing needs. Portola's design engineers continually develop and enhance the Company's existing products, offering new features attractive to customers and improved designs that enable customers to save time and cost in the capping process or in shipping. 37 The Company has also made a substantial investment in developing new product applications for existing markets as well as applications for new markets. To facilitate the process of enhancing and developing new products and to ensure ultimate market acceptance of such products, the Company encourages an on-going exchange of ideas with customers, container manufacturers, machinery manufacturers and sales and service personnel. This approach has enabled the Company to identify new product opportunities, such as the five gallon non-spill closure and the fitment, to design the necessary tooling for producing such products and to assist with customer presentations and installations. The Company's typical product development cycle has been less than one year. However, successful introduction of a new closure product can take two to three years, principally because customers who are comfortable with their existing closure products are generally slow to switch to a new design, particularly in light of the relatively small cost of the closure component to the overall packaging unit. The Company's product enhancements and new product developments reflect the Company's expertise in plastic packaging design and manufacturing. Approximately 39% of the Company's sales for the nine months ended May 31, 1995 were represented by products developed or redesigned by the Company within the past five fiscal years. NEW PRODUCT LINES AND APPLICATIONS To improve and expand its established product lines, the Company continually seeks to develop enhancements for existing products and to create new product applications utilizing existing technology. Among the new product development initiatives, management believes that three applications have significant near-term market potential. They are: (i) fitments for gable-top containers (i.e., conventional paperboard milk or juice cartons), (ii) 2.5 gallon dispensing closures for bottled water and (iii) 28mm push-pull closures for bottled water, flavored water and sports drinks. The following table describes these new product initiatives. PRODUCT LINE DESCRIPTION MARKET APPLICATION TARGETED CUSTOMERS - ------------------------ ---------------------------- ---------------------------- ---------------------------- Fitments Recloseable plastic Orange juice, lemonade and Major domestic and dispensing fitment for other juice products international dairy, juice polyethylene-coated, and other beverage companies gable-top paperboard cartons 2.5 gallon dispensing Tamper evident dispensing 2.5 gallon bottled water Bottled water companies closures closure container with dispensing feature 28mm push-pull closures Dual tamper evident closures Large market segment for North American beverage with push-pull feature bottled water, flavored producers water, sports drinks
FITMENTS Portola's fitment product line consists of recloseable, plastic dispensing fitments for polyethylene-coated paperboard cartons. Designed to overcome problems with conventional gable-top cartons (i.e. paperboard milk and juice cartons), the fitment is a unique low-cost packaging enhancement. Fitments represent a design change for paperboard cartons, providing consumers and packagers with numerous advantages. For the consumer, the fitment provides (i) easy opening and secure reclosure, (ii) sanitary dispensing (hands do not touch pouring outlet), (iii) highly visible external (and optional internal) tamper evidence and (iv) improved shelf life. For the packager, the fitment allows the retention of graphics and product distinction as compared to high density polyethylene ("HDPE"), polyethylene terephthalate ("PET") and LDPE jugs and eliminates leakage problems associated with the "adhesive" concept. With fitment application equipment developed by the Company, packagers can convert conventional gable-top production lines to incorporate streamlined application of the fitment closure. The resulting low manufacturing cost permits usage on low margin products at costs competitive with polyethylene jugs. 38 In March 1995, the Company entered into an agreement with an affiliate of Tetra Laval, a leading worldwide packaging company, to supply fitment application equipment. Under this agreement, as of September 21, 1995, the Company has received orders from the Tetra Laval affiliate for 41 fitment application machines of which 17 have been delivered and 24 are scheduled to be delivered by January 1996. Under normal operating conditions -- five days per week, one shift per day -- each machine can apply approximately 8 million fitments per year. The Company anticipates that it will incur expenditures of approximately $2.0 million through January 1996 to manufacture the equipment not yet delivered. Under the agreement, the Company is required to supply the equipment at cost. While these expenditures may reduce the Company's near term gross profit margins for fitments and related equipment, the Company anticipates that the agreement will give the Company the opportunity to sell fitments to be used by Tetra Laval's substantial customer base and that such sales may increase the Company's long term profitability. 2.5 GALLON DISPENSING CLOSURES The Company has developed a tamper evident closure for the popular 2.5 gallon bottled water container with a dispensing feature allowing the user to dispense water without lifting the container. Portola's design is an improvement over existing dispensing closures, offering greater reliability and enhanced performance features. Portola plans to market the 2.5 gallon dispensing closure to its current customers who produce bottled water. 28MM PUSH-PULL CLOSURES Portola has developed a 28mm push-pull closure for juice, water and isotonic beverage applications. The closure is designed for use on single-serving, one liter and smaller PET bottles with the standard 28mm neck finish. The Company believes that 28mm bottles represent a significant market segment and that customers are increasingly converting from a standard HDPE screw cap to the push-pull closure. The push-pull closure allows the product to be squeezed from the bottle, offering ease of use and quick reseal. The push-pull is made of three components, an HDPE base for rigidity and firmness in capping, an LDPE push-pull button or spout that is assembled with the base, and a clear polypropylene dust cover to protect the closure from contaminants. The 28mm push-pull provides a dual tamper evident, resealable closure. The Company plans to market the 28mm push-pull to North American beverage producers focusing on the bottled water, flavored water and isotonic beverage markets. Production of the closure began in April 1995. RAW MATERIALS AND PRODUCTION The principal raw material for the Company's plastic closures is injection molding grade LDPE resin, which accounts for approximately 65% of the cost of all raw materials purchased for the Company's plastic closures. Giving effect to the acquisition of Nepco, the Company purchased approximately 50 million and 59 million pounds of LDPE and other plastic resins during fiscal 1993 and fiscal 1994, respectively, and 45 million pounds during the first nine months of fiscal 1995. The Company believes that due to its volume purchases it is able to negotiate attractive pricing with resin suppliers. The Company has not experienced any significant difficulties over the past ten years in obtaining sufficient quantities of LDPE resin, although prices for LDPE resin can fluctuate over relatively short periods of time. In the past, the Company has been able to pass substantially all resin price increases on to its customers on a timely basis. In order to produce plastic closures, the resin, which is delivered as small pebble-size pellets to large storage silos, is conveyed through a pipeline system to an injection molding machine, where it is melted into a thick liquid state. Coloring agents are added as appropriate and the mixture is injected at high pressure into a specially designed, multi-cavity mold. The principal equipment in the Company's plants includes injection molding machines (the Company operates a total of 184 molding machines ranging in size from 10 to 300 tons clamping pressure), finishing lines to print and label caps and line them with foam or foil to meet customer requirements, and automated systems for handling and processing raw materials and finished goods. By automating its manufacturing opertions, the Company is able to limit its direct labor costs to less than 5% of sales while meeting the strict sanitary requirements necessary for producing food and beverage packaging products. 39 In the past, the Company has designed and manufactured many of its own molds. In recent years, the increasing size and complexity of certain molds for new products have caused the Company to out-source these mold construction needs. The Company maintains design control over these molds as well as the molds it still builds. The Company believes its mold expertise has led to reduced costs due to shorter molding cycle times and enhanced reliability and longevity of its tooling. As a result of the Nepco acquisition, Portola has derived significant cost savings through various raw material purchasing and production efficiencies. With respect to raw materials, the Company has reduced costs by (i) combining the volume of its purchasing with Nepco's purchases, (ii) taking advantage of Portola's purchasing relationships in making Nepco's purchases and (iii) standardizing grades of resin and color used by Nepco. More importantly, the Company has increased overall production efficiency through shared technology and adoption of improved manufacturing processes. Since the Nepco acquisition, management has continued to identify and evaluate the relative strengths of the Nepco operations and the Company's other manufacturing operations. The strengths of the Nepco operations include faster cycle times, as well as superior cooling systems and tooling design and tooling materials that are well-suited to the Nepco closures. The strengths of the Company's other operations include automation, maintenance, process control, quality control and minimizing scrap. Management plans to further develop strategies for improving production efficiency by adopting the respective strengths of each of the operations throughout the enterprise. PROPERTIES The Company owns or leases ten modern production facilities, which operate five to seven days a week, 24 hours a day. In addition, the Company's Canadian subsidiary leases two production facilities. The facilities are highly efficient due to automation and frequently scheduled maintenance in the plants. The Company believes that these facilities are well-maintained and in good operating condition and anticipates that, although substantial capital expenditures will be required to meet the production requirements for new and developing product lines, the facilities themselves will be sufficient to meet the Company's needs for the next several years. There can be no assurance, however, that unanticipated developments will not occur that would require the Company to add production facilities sooner than expected. The following table indicates the locations, functions, square footage and nature of ownership of these facilities.
NATURE OF LOCATION FUNCTIONS SQUARE FEET OWNERSHIP (1) - ---------------------------------------- --------------------------------------------- ------------- -------------- San Jose, CA Executive Office/Closure Mfg./Warehouse 74,000 leased(2) Engineering/Research and Development Facility 13,000 leased(2) Equipment Division 23,000 leased(2) Kingsport, TN Closure Mfg./Warehouse 76,000 owned Clifton Park, NY Closure Mfg./Warehouse 54,000 leased Batavia, IL Closure Mfg./Warehouse 70,000 leased New Castle, PA Executive Office/Closure Mfg./Warehouse 46,000 owned Sumter, SC Closure Mfg./Warehouse 45,000 owned Chino, CA Closure Mfg./Warehouse 64,000 owned Gresham, OR Closure Mfg./Warehouse 36,000 owned Fort Worth, TX Closure Mfg./Warehouse 27,000 owned Bettendorf, IA Closure Mfg./Warehouse 40,000 owned Richmond, British Columbia, Canada Bottle & Closure Mfg./Warehouse 49,000 leased Edmonton, Alberta, Canada Bottle Mfg./Warehouse 38,000 leased
(1) The facilities shown as leased in the table above are subject to long-term leases or lease options that extend for at least five years, except that (i) the lease of the Clifton Park facility expires in 1996 and (ii) the Edmonton facility is temporarily leased on a month-to-month basis pending completion of a 43,000 square foot facility in Edmonton being constructed for the Company's Canadian subsidiary. (2) The Company has entered into a nonbinding letter of intent to purchase the property covered by these leases (as well as certain real property adjacent thereto) for $7.0 million. 40 SALES, MARKETING AND CUSTOMER SERVICE The Company markets its products through its internal sales department and through a nationwide network of independent sales representatives. Calls on customers by these salespersons and representatives, along with participation at trade shows, are the primary means of customer contact. A number of the Company's customers are large corporate clients with numerous production facilities, each of which may make its own separate purchase decisions. The Company's most significant customers are processors and packagers of fluid milk, non-carbonated bottled water, chilled juice, other flavored drinks and condiments for wholesale and institutional use. The Company's customer base includes over 3,000 accounts. The Company's top ten customers and buying groups accounted for approximately 26% of the Company's sales during the nine months ended May 31, 1995, and none accounted for more than 6% of sales during that period. Most of the Company's customers have been doing business with the Company for more than ten years. Attention to customer service is a critical component of the Company's marketing effort. The Company's customers operate high-speed, high-volume production lines, with many handling perishable products. In order to assure that the production lines operate efficiently and avoid costly line stoppages, customers rely on the Company's ability to provide reliable, on-time delivery of its closure products and to maintain the uniform quality of those products. The Company also provides technical assistance to its customers in the form of an in-house service team that can be dispatched on short notice to solve a bottling line problem throughout the country. Several of the Company's field service representatives have extensive blowmolding technical expertise that is especially important in resolving bottle leakage problems for customers. INTERNATIONAL SALES AND JOINT VENTURES Although the Company's sales are primarily domestic, the Company expects significant growth in international sales, particularly in the market for water cooler bottle closures and water bottle capping and filling equipment. The United States bottled water industry, in general, uses more sophisticated packaging materials and processes than bottled water companies use in the rest of the world. The Company believes that bottled water companies and other non-carbonated beverage companies in Europe, the Far East, Latin America and elsewhere are beginning to adopt more advanced packaging materials and techniques, and that, as they do, they will become potential customers for the Company's plastic closure products and equipment. The Company's international sales have in the past consisted of significant sales of PortaPlants (see "-- Products -- PortaPlants"). In fiscal 1993, fiscal 1994 and the first nine months of fiscal 1995, international export sales were $6.6 million, $8.4 million and $11.9 million, respectively, of which $3.2 million, $3.4 million and $4.6 million, respectively, represented sales of PortaPlants. The principal plastic closure products exported by the Company during these periods were five gallon plastic closures for water cooler bottles and small closures for dairy and juice products. In the last several years, the Company has utilized joint ventures with bottle manufacturers and distributors to gain footholds in international markets. By offering plastic closures, capping equipment and turnkey bottling systems, the Company can provide joint venture partners with a complete solution to their bottling and capping requirements. Until recently, the Company had three international joint ventures: (i) a 50% interest in Canada Cap Snap Corporation, a Canadian corporation formed in 1990 and engaged in manufacturing and distributing 38mm bottle closures in Canada, (ii) a 50% interest in Cap Snap (U.K.) Ltd., a corporation formed in the United Kingdom in 1992 with a local bottle manufacturer to manufacture and sell 38mm caps, and (iii) a 50% interest in Cap Snap Mexico, a joint venture formed in Mexico in 1993 with a local producer of plastic bottles and closures. In June 1995, the Company consummated the Canadian Acquisition by acquiring the remaining 50% interest in Canada Cap Snap Corporation, together with a 100% interest in two affiliated plastic bottle manufacturing companies. In September 1995, the Company consummated the U.K. Acquisition by acquiring the remaining 50% interest in Cap Snap (U.K.) Ltd. See "Business -- Business Strategy -- Expanding Sales in International Markets." 41 In April 1995, the Company entered into an agreement with an affiliate of Tetra Laval, one of the world's leading packaging distributors, to supply certain fitment application equipment. The Company anticipates that through the agreement it will have the opportunity to sell its fitments to Tetra Laval's substantial customer base. See "New Product Lines and Applications -- Fitments." COMPETITION The Company believes that the most important factors in marketing container closures to the food and beverage industry are price, product design, product quality and reliability and customer service. Among the attributes that distinguish the Company from other sellers of closure systems and provide a competitive advantage are the Company's proprietary products; the Company's ability to provide its customers with innovative, low-cost closures and complete capping systems; the Company's reputation for quality, reliability and service; and the Company's automated and strategically located production facilities and in-house tool manufacturing capability. While no single competitor offers products that compete with all of the Company's product lines, the Company faces direct competition in each of its product lines from a number of companies, many of which have financial and other resources that are substantially greater than those of the Company. As the Company broadens its product offerings, it can expect to meet increased competition from additional competitors with entrenched positions in those product lines. The Company also faces direct competition from bottling companies and other food and beverage providers that elect to produce their own closures rather than purchase them from outside sources. In addition, the packaging industry has numerous well-capitalized competitors, and there is a risk that these companies will expand their product offerings, either through internal product development or acquisitions of any of the Company's direct competitors, to compete in the niche markets that are currently served by the Company. These competitors, as well as existing competitors, could introduce products or establish prices for their products in a manner that could adversely affect the Company's ability to compete. Because of the Company's product concentration, an increase in competition or any technological innovations with respect to the Company's specific product applications, such as the introduction of lower-priced competitive products or products containing technological improvements over the Company's products, could have a significant adverse effect on the Company's financial condition and results of operations. LITIGATION The Company is currently engaged in patent infringement litigation with Scholle Corporation ("Scholle"), which commenced an action against the Company in the United States District Court, Northern District of California in July 1992 alleging that the Company infringed upon certain patents of Scholle relating to five gallon non-spill closures. In February 1995, the jury rendered a verdict adverse to the Company and in favor of Scholle, which verdict has not yet been entered by the court. Post-trial motions have been filed and argued but not yet ruled on by the court. If the jury verdict is entered by the court, the Company intends to appeal. The jury verdict would hold the Company liable for damages through May 31, 1995 in the amount of $0.01 per closure. For the period beginning January 1992, when the product was introduced, through May 31, 1995, such damages would be approximately $800,000, which the Company has accrued in its financial statements. The Company's total non-recurring legal expenses associated with the Scholle litigation (not including such accrued damages) for the fiscal year ended August 31, 1992, 1993 and 1994 were $68,000, $275,000 and $277,000, respectively; for the nine months ended May 31, 1994 and 1995, were $255,000 and $846,000, respectively; and for the twelve months ended May 31, 1995 were $867,000. The Company's total sales of the product involved in the litigation were $4.0 million during the twelve month period ended May 31, 1995. The Company is continuing to produce and sell the product and is accruing damages in the amount of $0.01 per closure. There is a risk that Scholle may seek to enjoin the Company from producing and selling the product in the future and may seek to recover damages in excess of $0.01 per closure (up to $0.03 per closure) for sales of the product after May 31, 1995. However, Scholle might elect not to seek such remedies since it does not produce a competing product and since, if either or both of the remedies were granted, the Company would likely introduce an alternative product which it has designed and which it believes will not infringe upon the patents involved in the litigation. It can be anticipated that additional tooling costs 42 will be incurred and market disruption may result in the event that the Company changes to the new product design. The Company does not anticipate that the amount of damages that may be awarded in the litigation, or any product change that may result from the litigation, will have a material adverse effect on its future results of operations, although there can be no assurance that this will be the case. EMPLOYEES As of July 31, 1995, the Company had 800 full-time employees, 32 of whom were engaged in product development, 30 in marketing, sales and customer support, 705 in manufacturing and 33 in finance and administration. The Company uses seasonal and part time employees for training, vacation replacements and other short term requirements. None of the Company's employees in the United States are represented by any collective bargaining agreements (approximately 22 of the employees of the Company's recently-acquired Canadian subsidiary are members of the Teamsters Union), and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. 43 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
YEARS WITH NAME AGE COMPANY POSITION - ------------------------------- --- --------------- -------------------------------------------------------------- Jack L. Watts 47 9 Chairman of the Board and Chief Executive Officer John L. Lemons 57 7 President and Director Howard R. Girbach 47 3 President -- Packaging Division Robert Plummer 36 1 President -- Nepco Division, Vice President and General Manager -- Equipment Division Dannie K. Martz 43 0 President -- Cap Snap Division Robert R. Strickland 51 4 Vice President -- Finance, CFO and Assistant Secretary Douglas L. Cullum 40 9 Vice President -- Manufacturing Technology Laurie D. Bassin 46 9 Vice President -- Corporate Development David A. Keefe 41 9 Corporate Controller Rodger A. Moody 42 20 Vice President, Managing Director -- International Division Timothy Tomlinson (1) 45 9 Secretary and Director Larry C. Williams (1)(2) 45 6 Director Martin R. Imbler (2) 47 6 Director Christopher C. Behrens 34 1 Director
- ------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Mr. Watts has been Chairman of the Board and Chief Executive Officer of the Company since January 1986. From 1982 to 1985, he was Chairman of the Board of Faraday Electronics, a supplier of integrated circuits and board level microprocessors. Mr. Lemons has been President of the Company since June 1988 and a member of its Board of Directors since February 1986. He was President and Chief Executive Officer of Faraday Electronics from 1983 to 1988. Mr. Lemons intends to resign as President and as a director of the Company in October 1995. Mr. Girbach has been President - Packaging Division of the Company since August 1995. From August 1992 to August 1995, he was President - Cap Snap Division of the Company. From June 1975 to July 1992, he was employed by FMC Corporation, a manufacturer of chemicals and equipment, most recently as Director of Operations for the Ground Systems Division from February 1990 to July 1992 and Division General Manager of the Fire Apparatus Division from April 1988 to February 1990. Mr. Plummer has been Vice President and General Manager - Equipment Division of the Company since May 1994. In June 1995, it was announced that Mr. Plummer will assume additional responsibilities as President of the Nepco Division. From May 1989 to May 1994 he was employed by General Motors Corporation, as an Assembly Advisor for New United Motor Manufacturing, Inc., an automobile manufacturing joint venture between General Motors and Toyota from February 1993 to May 1994 and as Product Manager of the Harrison Division of General Motors Corporation, which produces automotive engine cooling and heating, ventilating, and air conditioning systems, from May 1989 to February 1993. Mr. Martz has been President - Cap Snap Division since September 1995. From March 1995 to September 1995, he was Senior Vice President of Cymer Laser Technologies, a laser manufacturer. 44 From January 1992 to March 1995, he was Vice President and General Manager of the Varian - TEL Products Division of Varian Associates, Inc., a manufacturer of semiconductor equipment, electrical devices, instruments and other electronics products, and from October 1986 to January 1992, he was employed by KLA Instruments Corporation, a company involved in the factory automation, manufacturing, photonics, and test and measurement industries, most recently as Vice President and General Manager, Automated Test Systems Division. Mr. Strickland has been Vice President - Finance and Chief Financial Officer of the Company since July 1991. From September 1990 to July 1991, he served as Senior Vice President and Chief Financial Officer at Personics Corporation, a company that manufactured a system of producing audio cassette tapes in retail record stores. From February 1988 to June 1990, he was employed by Lucky Stores, Inc., a supermarket chain, most recently as Vice President Finance and Administration. Mr. Cullum has been Vice President - Manufacturing Technology of the Company since November 1994. He joined the Company in 1986 and became Vice President - Operations of the Cap Snap Division in April 1987. Mr. Moody has been Vice President - Managing Director - International Division of the Company since October 1994. He has been with the Company since 1975 and has worked in a variety of functional areas, including production, administration, marketing/sales, equipment and general management. Ms. Bassin has been Vice President - Corporate Development of the Company since February 1993. From August 1986 to February 1993, she was Director of Marketing of the Company. Prior to that time, she was employed in the Consumer Service and Marketing Department of Collagen Corporation, a biomedical company. Mr. Keefe has been Corporate Controller of the Company since February 1986. Mr. Tomlinson has been Secretary and a director of the Company since January 1986. He also serves as a director of Oak Technology, Inc., a designer and marketer of multimedia semiconductors and related software. He has been a partner in the law firm of Tomlinson Zisko Morosoli & Maser since 1983. Mr. Williams has been a director of the Company since January 1989. He founded The Breckenridge Group, Inc., an investment banking firm in Atlanta, Georgia, in April 1987 and is one of its principals. Mr. Imbler has been a director of the Company since March 1989. He has been President, Chief Executive Officer and a director of Berry Plastics Corporation ("Berry"), a manufacturer of plastic packaging, since January 1991. He has also served as a director of BPC Holding Corporation, an entity affiliated with Berry, since 1991. From July 1987 to January 1991, he was President and Chief Executive Officer of Risdon Corporation, a cosmetic packaging company. Mr. Behrens has been a director of the Company since June 1994. He has been an officer of The Chase Manhattan Bank, N.A. ("Chase Bank") since 1986 and an officer of Chase Manhattan Investment Holdings, Inc. ("Chase Manhattan Investment Holdings") and Chase Manhattan Capital Corporation ("Chase Capital"), since 1990. From 1990 to 1993, he was a Vice President in the Merchant Banking Group. Prior to 1990, Mr. Behrens was an associate in the Mezzanine Finance Group. Mr. Behrens also serves as a director of Covenant Care, Inc., an operator of skilled nursing centers, and Pennant Foods, Inc., a franchisee of Wendy's International, Inc. quick service restaurants. Each director listed above was elected at the Company's Annual Meeting of Shareholders held in January 1995 and will serve until his successor has been elected and qualified or until his earlier resignation or removal. Executive officers are chosen by, and serve at the discretion of, the Board of Directors of the Company (the "Board"). 45 DIRECTOR COMPENSATION Each of Messrs. Imbler, Tomlinson and Williams receives as compensation for his services as a director $2,500 per quarter, and $2,000 for each meeting of the Board attended, and is reimbursed for his reasonable expenses in attending Board meetings. None of the other Board members is compensated as such. See "Compensation Committee Interlocks and Insider Participation." EXECUTIVE COMPENSATION The following table summarizes all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during the fiscal year ended August 31, 1994 by the Company's Chief Executive Officer and the Company's four other most highly compensated executive officers during fiscal 1994 (together, the "Named Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ------------------------------------------- ------------------- OTHER ANNUAL SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION (2) UNDERLYING OPTIONS COMPENSATION (3) - ------------------------------ ----------- ----------- ----------------- ------------------- ----------------- Jack L. Watts Chairman of the Board and Chief Executive Officer.... $ 201,093 $ 150,000 $ 50,373 -- $ 6,999 John L. Lemons President................... $ 215,913 $ 78,000 $ 8,188 -- $ 7,839 Howard R. Girbach President - Packaging Division................... $ 149,261 $ 29,300 $ 7,200 -- $ 2,404 Robert R. Strickland Vice President - Finance and Chief Financial Officer.... $ 133,443 $ 57,500 -- -- $ 2,404 Douglas L. Cullum Vice President - Manufacturing Technology... $ 136,839 $ 16,300 -- -- $ 2,404
- ------------------------ (1) Includes bonuses paid during fiscal 1995 for services rendered during fiscal 1994, but not bonuses paid during fiscal 1994 for services rendered during fiscal 1993. (2) Includes automobile and gas allowances and, with respect to Mr. Watts, $41,800 in consulting fees paid to PPI Management, Inc., a corporation of which Mr. Watts is the sole shareholder and employee. (3) Represents insurance premiums on term life insurance of $5,435 for Mr. Lemons and $4,595 for Mr. Watts, a Company profit-sharing contribution of $2,304 and a Company 401(k) matching contribution of $100 for each of the Named Officers. No stock options were granted to any of the Named Officers during fiscal 1994 or thereafter. 46 The following table sets forth certain information regarding option exercises during fiscal 1994 and the number of shares covered by both exercisable and unexercisable stock options as of August 31, 1994 for each of the Named Officers. AGGREGATE OPTION EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT AUGUST 31, 1994 AT AUGUST 31, 1994 (1) SHARES ACQUIRED ---------------------------- ---------------------------- NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------- ----------------- ------------------- ------------ -------------- ------------ -------------- Jack L. Watts................... -- -- -- -- $ -- $ -- John L. Lemons.................. -- -- -- -- -- -- Howard R. Girbach............... -- -- 47,000 93,000 58,750 116,250 Robert R. Strickland............ -- -- 48,000 32,000 96,000 64,000 Douglas L. Cullum (2)........... -- -- 80,000 -- 251,200 --
- ------------------------ (1) The value of an "in-the-money" option represents the difference between the estimated fair market value of the underlying securities at August 31, 1994 of $3.75 per share, as determined by the Company's Board of Directors, minus the exercise price of the options. (2) The table does not reflect options exercised by Mr. Cullum on April 6, 1995 to purchase 25,000 shares of Common Stock. EMPLOYEE BENEFIT PLANS 1988 STOCK OPTION PLAN. The 1988 Stock Option Plan (the "1988 Plan") was adopted by the Board in September 1988 and approved by the Company's shareholders in May 1989. The 1988 Plan has been terminated, although options granted under the 1988 Plan remain outstanding, as indicated below. A total of 1,154,010 shares of Class B Common Stock, Series 1 is subject to issuance with respect to outstanding options granted under the 1988 Plan. Options may be granted under the 1988 Plan to officers, key employees and independent contractors of the Company, or any subsidiary of the Company. Options granted under the 1988 Plan may be incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options ("NQSOs"); however, only employees of the Company, or of a parent or subsidiary of the Company, may be granted ISOs. Generally, options under the 1988 Plan expire ten years after the date of grant (subject to shortened exercisability periods for terminated employees). The 1988 Plan may be administered by the Board or by a committee appointed by the Board, which has discretion to select optionees and to establish the terms and conditions of the options, subject to the provisions of the 1988 Plan. The 1988 Plan is currently administered by the Board. The exercise price of an option granted under the 1988 Plan may not be less than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair market value of the Company's Class B Common Stock, Series 1 on the date of grant, except that, for an ISO granted to a person holding 10% or more of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, the exercise price must be not less than 110% of such fair market value. Options generally become exercisable as to 20% of the shares one year after the vesting start date and as to an additional 5% of the shares for each full quarter thereafter that the optionee renders services to the Company. 1994 STOCK OPTION PLAN. The 1994 Stock Option Plan (the "1994 Plan") was adopted by the Board and the Company's shareholders in November 1994. The 1994 Plan will terminate on November 17, 2004 or such earlier time as all of the shares of Class B Common Stock, Series 1 reserved thereunder have been issued. 47 A total of 1,000,000 shares of Class B Common Stock, Series 1 has been reserved for issuance under the 1994 Plan. Options may be granted under the 1994 Plan to officers, key employees and independent contractors of the Company, or any subsidiary of the Company. Options granted under the 1994 Plan may be ISOs within the meaning of Section 422 of the Code, or NQSOs; however, only employees of the Company, or a parent or subsidiary of the Company, may be granted ISOs. Generally, options under the 1994 Plan expire 10 years after the date of grant (subject to shortened exercisability periods for terminated employees). The 1994 Plan allows a maximum term of 10 years from the date the option is granted (or five years in the case of any option granted to the holder of 10% or more of the shares of the Company). The 1994 Plan may be administered by the Board or by a committee appointed by the Board, which has discretion to select optionees and to establish the terms and conditions of the options, subject to the provisions of the 1994 Plan. The 1994 Plan is currently administered by the Board. The exercise price of an option granted under the 1994 Plan may not be less than 85%, with respect to an NQSO, or 100%, with respect to an ISO, of the fair market value of the Company's Class B Common Stock, Series 1 on the date of grant, except that, for an ISO granted to a person holding 10% or more of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, the exercise price must be not less than 110% of such fair market value. Options generally become exercisable as to 20% of the shares one year after the vesting start date and as to an additional 5% of the shares for each full quarter thereafter that the optionee renders services to the Company. As of May 31, 1995, under both the 1988 and 1994 Plans, options to purchase an aggregate of 1,617,190 shares of Class B Common Stock, Series 1, had been exercised, directors, officers, consultants and other employees held non-qualified stock options to purchase an aggregate of 1,154,010 shares, with a weighted average exercise price of $1.34 and directors, officers, and other employees held incentive stock options to purchase an aggregate of 230,000 shares, with a weighted average exercise price of $3.90. An additional 770,000 shares remain available for future grants under the 1994 Plan. 401(K) PLAN. In 1987, the Company's Board of Directors adopted a profit sharing plan that is intended to qualify under Section 401(k) of the Code (the "401(k) Plan"). Each employee of the Company who is at least 21 years of age, has completed one year of service and is not covered by a collective bargaining agreement is eligible to participate in the 401(k) Plan. A participating employee may make pre-tax contributions of up to 10% of such employee's compensation that does not exceed the Social Security Wage Base ("Eligible Compensation Base") in effect at the end of the plan year. In addition, the Company may, at the discretion of the Board of Directors, make contributions. In fiscal 1992, fiscal 1993 and fiscal 1994, the Company contributed 3.0%, 3.0% and 4.0%, respectively, of each participant's Eligible Compensation Base. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Company's Board of Directors are Timothy Tomlinson and Larry C. Williams. Mr. Tomlinson is also the Company's Secretary. In 1989, the Company granted to TZM Investment Fund, of which Mr. Tomlinson is a general partner, options to purchase 124,026 shares of Class B, Series 1 Common Stock for $1.00 per share. TZM Investment Fund has exercised a portion of those options, purchasing, during the period from December 1989 to September 1991, 66,000 shares of Class B, Series 1 Common Stock and, during the period from January through April 1995, 28,042 shares of Class B, Series 1 Common Stock. TZM Investment Fund continues to hold the balance of the options. In 1989, the Company also granted to Mr. Williams and other principals of The Breckenridge Group, Inc. ("Breckenridge"), an investment banking firm of which Mr. Williams is a principal, options to purchase 124,026 shares of Class B, Series 1 Common Stock for $1.00 per share (Mr. Williams received options to purchase 33,720 of such shares). Such principals of Breckenridge have exercised a portion of those options, purchasing, during the period from December 1989 to September 1991, 66,000 shares of Class B, Series 1 Common Stock (17,670 of which 48 were purchased by Mr. Williams), and such principals continue to hold the balance of the options (Mr. Williams continues to hold options to purchase 16,050 shares). In 1991, TZM Investment Fund received from the Company, and continues to hold, options to purchase 90,000 shares of the Company's Common Stock for $1.75 per share. The Company retains as its general counsel the law firm of Tomlinson Zisko Morosoli & Maser, of which Mr. Tomlinson is a general partner. For legal services rendered during fiscal 1992, 1993 and 1994, the Company paid Mr. Tomlinson's law firm $267,000, $451,000 and $420,000, respectively, including expenses. In March 1992, the Company engaged Breckenridge to act as investment banker in a possible equity financing and as a finder for the purposes of introducing the Company to one or more financial institutions to provide a senior financing loan package. In fiscal year 1992, the Company paid Breckenridge a $350,000 fee for assistance in preparing a confidential private placement memorandum for a possible equity offering and in evaluating the offering. In fiscal 1993, the Company paid Breckenridge a $200,000 finder's fee, plus expense reimbursement of $11,000, in connection with the closing of a new senior financing loan package. For additional information regarding Messrs. Tomlinson and Williams and their affiliates, see "Management -- Executive Officers and Directors," "Certain Transactions -- Transactions with Entities Affiliated with Directors" and "Principal Stockholders." INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of the Company provide that (i) the Company is required to indemnify its directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law, (ii) the Company may indemnify its other officers, employees and agents as set forth in the Delaware General Corporation Law, (iii) to the fullest extent permitted by the Delaware General Corporation Law, the Company is required to advance expenses, as incurred, to its directors and executive officers in connection with a legal proceeding (subject to certain exceptions), (iv) the rights conferred in the Bylaws are not exclusive and (v) the Company is authorized to enter into indemnification agreements with its directors, officers, employees and agents. The Company has entered into indemnification agreements with each of its current directors, (except Christopher Behrens) and certain of its executive officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Company's Bylaws and to provide additional procedural protections. The indemnification agreements generally provide for the indemnification, to the fullest extent permitted by law, of the director or officer for liability and expenses incurred in connection with legal proceedings brought against such director or officer in his capacity as agent for the Company, with certain exceptions. At present, there is no pending litigation or proceeding involving a director, officer or employees of the Company regarding which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. As permitted by the Delaware General Corporation Law, the Company's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors of monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law regarding unlawful dividends or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. 49 CERTAIN TRANSACTIONS LOANS TO EMPLOYEES In November 1991, the Company loaned Daniel Luch, Vice President of Research and Development, $109,000 towards the purchase of a home. The loan is represented by a nonrecourse promissory note secured by a deed of trust. The note may be prepaid in full in one or more installments on or before the sixth anniversary of the date of the note. Prepayment must include accrued interest at the rate of 6%. If the note has not been prepaid, satisfaction of the note is limited to proceeds from sale of the home in accordance with a formula outlined in the loan agreement. In January 1992, the Company loaned Jack L. Watts, Chairman of the Board and Chief Executive Officer, $250,000 represented by a secured promissory note. The Company received a security interest in certain shares of Class B Common Stock, Series 1 owned by Mr. Watts. Interest accrues at a rate equal to 2.0% above the Company's borrowing rate under its Current Revolving Credit Facility. The note plus accrued interest was originally due and payable in January 1993 but the due date has been extended to January 1996 by the Board. In September 1992, the Company loaned Howard R. Girbach, President -- Packaging Division, $75,000 towards the purchase of a home. The loan is represented by a nonrecourse promissory note secured by a deed of trust. The note may be prepaid in full in one or more installments on or before the sixth anniversary of the date of the note. Prepayment must include accrued interest at the rate of 6.0%. If the note has not been prepaid, satisfaction of the note is limited to proceeds from sale of the home in accordance with a formula outlined in the loan agreement. TRANSACTIONS WITH ENTITIES AFFILIATED WITH DIRECTORS The Company utilizes Berry Plastics Corporation for mold development, engineering and manufacturing services. Martin Imbler is a director of the Company and President and Chief Executive Officer of Berry Plastics Corporation. During fiscal 1992, 1993 and 1994, the Company paid Berry Plastics Corporation $63,000, $183,000 and $162,000, respectively, for mold development. Since June 1988, Chase Bank has held the Company's Senior Subordinated Notes in the principal amount of $10.0 million and due June 30, 2002. The Senior Subordinated Notes will be repaid in full with the net proceeds of this offering, together with a prepayment premium (estimated to be $613,000 at May 31, 1995). In each of fiscal 1992, 1993 and 1994, the Company paid Chase Bank interest on this indebtedness of $1.35 million. The Company paid refinancing amendment and advisory fees of approximately $1.0 million and $258,000 to Chase Bank during fiscal 1993 and fiscal 1994, respectively. Chase Bank is an affiliate of Chase Securities, Inc., one of the Underwriters in this offering, and Chase Capital, which, together with related parties, owns approximately 20% of the Company's outstanding voting capital stock. See "Principal Stockholders." Christopher C. Behrens, a director of the Company, is also a Vice President of Chase Bank and Chase Capital. In June 1994, Chase Capital purchased for $3.75 per share (i) 800,000 shares of Class B Common Stock, Series 1 from the Company, (ii) 80,000, 80,000 and 93,333 shares of Class B Common Stock, Series 1 from Jack L. Watts, LJL Cordovan Partners and John L. Lemons, respectively, and (iii) 280,000 shares of Class B Common Stock, Series 2 from Robert Fleming Nominees, Ltd. ("RFNL"). In connection with these purchases, Chase Capital, RFNL and Heller Financial, Inc., the lender under the Current Credit Facility, received certain demand and piggyback registration rights. Chase Capital became a participant in an earlier agreement between the Company and RFNL under which (i) the Company has the right of first offer to purchase any shares of the Company's capital stock that either shareholder proposes to sell to any nonrelated party and (ii) each shareholder has a right of first offer to purchase any Class B Common Stock, Series 1 that the Company proposes to sell. Chase Capital is also a party to certain shareholders agreements providing for certain rights of first refusal as described below. See "-- Shareholders Agreements." In addition, the parties to these shareholders agreements have granted to Chase Capital certain co-sale rights to participate in the sale by any such shareholders of more than 25.0% of the outstanding shares of the Company's common stock. One of the shareholders agreements 50 also provides that the Company is prohibited from (i) entering into any merger, consolidation or repurchase of capital stock, (ii) making certain amendments to its Bylaws or Certificate of Incorporation or (iii) entering into certain other significant transactions, without the approval of Chase Capital. Pursuant to that agreement, Jack L. Watts, RFNL and their permitted transferees have agreed to vote their shares in favor of a nominee of Chase Capital as a director of the Company. Mr. Behrens is Chase Capital's current nominee. In April 1995, Chase Capital purchased for $4.00 per share (i) 265,000 shares of the Company's Class B Common Stock, Series 1 from various shareholders of the Company (including 110,000, 57,614, 25,000 and 7,500 shares that were sold by Jack L. Watts, John L. Lemons, Douglas Cullum (and their affiliates) and TZM Investment Fund, respectively) and (ii) 250,000 shares of the Company's Class B Common Stock, Series 2 from RFNL. In June 1995, pursuant to an agreement reached in April 1995, the Company sold for $4.00 per share 200,000 shares of Class B Common Stock, Series 1 to Chase Capital, and Chase Capital purchased 34,000 shares of Class B Common Stock, Series 1 for $4.00 per share from various shareholders. For information concerning certain transactions between the Company and Timothy Tomlinson, Larry C. Williams or their respective affiliates, see "Management -- Compensation Committee Interlocks and Insider Participation." Messrs. Tomlinson and Williams are directors of the Company and the members of the Compensation Committee of the Board of Directors. The Company's policy is that it will not make loans to, or enter into other transactions with, directors, officers or other affiliates unless such loans or transactions are approved by a majority of the Company's disinterested directors, may reasonably be expected to benefit the Company and, except to the extent that loans to officers of the Company have been entered into in part in recognition of the value of the officers' services to the Company, are on terms no less favorable to the Company than could be obtained in arms'-length transactions with unaffiliated third parties. SHAREHOLDERS AGREEMENTS A majority of the Company's shares, including shares held by Jack L. Watts, are subject to shareholders agreements under which the Company has a right of first refusal in the event of a proposed transfer of such shares of the Company's common stock to a transferee not related to the shareholder. In the event the Company does not exercise its right of first refusal, the other shareholders that are parties to the agreements have similar first refusal rights. 51 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of each class of the Company's voting securities as of September 21, 1995 by (i) each person known by the Company to be the beneficial owner of more than 5% of such class, (ii) each director, (iii) each Named Officer and (iv) all executive officers and directors as a group.
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF TITLE OF CLASS (1) NAME OF BENEFICIAL OWNER OWNERSHIP (2) CLASS (2) - --------------------------------------- --------------------------------------- ------------------- ------------- Class B Common Stock, Series 1 Jack L. Watts (3) 4,058,021 34.4% Class B Common Stock, Series 2 Robert Fleming Nominees Limited, a 1,755,715 14.9% United Kingdom Corporation (4) Class B Common Stock, Series 1 Christopher C. Behrens (5) 1,552,333 13.2% Class B Common Stock, Series 1 Chase Manhattan Capital Corporation (6) 1,552,333 13.2% Class B Common Stock, Series 2 Christopher C. Behrens (5) 815,715 6.9% Class B Common Stock, Series 2 Chase Manhattan Capital Corporation(6) 815,715 6.9% Class B Common Stock, Series 1 Gary L. Barry (7) 607,965 5.2% Class B Common Stock, Series 1 John L. and Mary Ann Lemons 574,992 4.9% Class B Common Stock, Series 1 Timothy Tomlinson (8) 245,984 2.1% Class B Common Stock, Series 1 Howard R. Girbach (9) 127,000 1.0% Class B Common Stock, Series 1 Robert R. Strickland (10) 88,000 * Class B Common Stock, Series 1 Douglas L. Cullum (11) 70,000 * Class B Common Stock, Series 1 Larry C. Williams (12) 66,371 * Class B Common Stock, Series 1 Martin R. Imbler 20,000 * Class B Common Stock, Series 1 All executive officers and directors as 8,021,978 65.4 % a group (14 persons)(13)
- ------------------------ * Less than one percent (1)The Company's Class B Common Stock, Series 1 and Class B Common Stock, Series 2 have the same voting rights, each share being entitled to one vote. The Class B Common Stock, Series 2 has a liquidation preference equal to $0.60 on each distributed dollar in the event that the value of the Company's assets available for distribution is less than $1.75 per share. Each share of Class B Common Stock, Series 2 is convertible at any time at the option of the holder into one share of Class B Common Stock, Series 1 and will be automatically converted into one such share (i) in the event that shares of Class B Common Stock, Series 1 shall be sold in a firm commitment public offering in which the aggregate public offering price is not less than $10,000,000 or (ii) immediately prior to the effectiveness of a merger or consolidation in which the Company is not the surviving entity and in which the value of the property to be received by the stockholders shall be not less than $1.75 per share. No shares of Class A Common Stock are issued or outstanding, although immediately exercisable warrants to purchase 2,492,741 of such shares are outstanding. Chase Capital holds 2,052,526 of such warrants. The Class A Common Stock is non-voting and each share of Class A Common Stock may be converted into one share of Class B Common Stock, Series 1, at the option of the holder, in the event that shares of Class B Common Stock, Series 1 shall be sold in a firm commitment public offering in which the aggregate public offering price is not less than $10,000,000. 52 (2)In accordance with the rules of the Commission, shares are beneficially owned by the person who has or shares voting or investment power with respect to such shares. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Common Stock subject to options that are exercisable within 60 days of September 21, 1995 are deemed to be outstanding and to be beneficially owned by the person holding such option for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (3)Includes 614,712 shares held by LJL Cordovan Partners, L.P., of which Mr. Watts is the General Partner and 52,132 shares held by trusts for the benefit of Mr. Watts' children. Mr. Watt's address is 890 Faulstich Court, San Jose, California 95112. (4)The address of this shareholder is c/o Robert Fleming & Co. Ltd., 25 Copthall Avenue, London, EC2R 7DR. (5)Represents shares held by Chase Capital and related parties. Mr. Behrens is a Vice President of Chase Capital. Does not include warrants held by Chase Capital to purchase 2,052,526 shares of Class A Common Stock at $0.60667 per share, which shares are non-voting. Mr. Behrens disclaims beneficial ownership of the 1,303,486 shares of Class B Common Stock, Series 1 and the 776,095 shares of Class B Common Stock, Series 2 owned by Chase Capital. The address of this shareholder is One Chase Manhattan Plaza, New York, New York 10081. (6)Represents shares held by Chase Capital and related parties. Does not include warrants to purchase 2,052,526 shares of Class A Common Stock at $0.60667 per share, which shares are non-voting. The address of this shareholder is One Chase Manhattan Plaza, New York, New York 10081. (7)Mr. Barry's address is 2180 Sand Hill Road, Suite 350, Menlo Park, California 95025. (8)Includes 40,000 shares held by First TZMM Investment Partnership, of which Mr. Tomlinson is a general partner, 66,000 shares held by TZM Investment Fund of which Mr. Tomlinson is a general partner and 119,984 shares subject to options held by TZM Investment Fund that are exercisable within 60 days of September 21, 1995. (9)Includes 67,000 shares subject to an option exercisable within 60 days of September 21, 1995. Also includes 12,000 shares held by Cupertino National Bank, Custodian, Howard Girbach IRA. (10)Includes 68,000 shares subject to options exercisable within 60 days of September 21, 1995. (11)Includes 55,000 shares subject to options exercisable within 60 days of September 21, 1995. (12)Includes 16,050 shares subject to options exercisable within 60 days of September 21, 1995. Does not include (i) 123,756 shares and (ii) 41,976 shares subject to options exercisable within 60 days of September 1, 1995, held in the individual names of four other principals of The Breckenridge Group, Inc. (13)Includes all of the shares shown as included in footnotes (3), (5) and (8) through (12). 53 DESCRIPTION OF THE NEW CREDIT FACILITY GENERAL Concurrently with this offering, the Company will enter into the New Credit Facility with Heller Financial, Inc., the lender under the Company's Current Revolving Credit Facility and Current Term Loan Facility. The New Credit Facility will provide for revolving loans to the Company in an aggregate amount not to exceed $35.0 million. The loans will constitute senior secured indebtedness of the Company. The consummation of this offering is contingent upon the closing of the New Credit Facility. The information set forth herein relating to the New Credit Facility is qualified in its entirety by reference to the complete text of the documents entered into or to be entered into in connection therewith, proposed forms of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. AVAILABILITY Borrowings under the New Credit Facility will be subject to a borrowing base of 85% of "Eligible Accounts," plus 60% of "Eligible Inventory" and 40% of "Eligible PPE" (generally, the net book value of the Company's property, plant and equipment), as those terms are defined in the New Credit Facility. Given the Company's current levels of Eligible Accounts, Eligible Inventory and Eligible PPE and the operation of financial ratios contained in the New Credit Facility, the Company expects to be able to draw up to approximately $23.7 million of the $35.0 million committed under the New Credit Facility at the closing of this offering or shortly thereafter, assuming compliance with certain ministerial post-closing conditions; however, the Company does not presently intend to make any draw under the New Credit Facility at closing. The Company's ability to borrow under the New Credit Facility in the future will be subject to the size of its borrowing base as well as compliance with covenants and financial ratios contained in the New Credit Facility. INTEREST The interest rate will be (i) Base Rate plus 1.25% or (ii) LIBOR plus 2.25%, at the Company's option. The Base Rate is a variable rate of interest per annum calculated daily on the basis of a 360 day year equal to the rate of interest from time to time published by the Board of Governors of the Federal Reserve System in Federal Reserve statistical release H.15(519) entitled "Selected Interest Rates" as the Bank prime loan rate. The LIBOR option is available for interest periods of one, two, three or six months. On LIBOR loans as to which the interest period is six months, and on Base Rate loans, interest will be payable quarterly in arrears. On LIBOR loans as to which the interest period is one, two or three months, interest will be payable at the end of the interest period. Interest will be calculated daily on the basis of a 360-day year for the actual number of days elapsed. Repayment of LIBOR loans on any day other than the last day of the applicable interest periods, or failure to borrow any amount on the date scheduled for borrowing, will require compensation for breakage costs. A fee of 0.375% per annum will be charged on the average daily unused portion of the New Credit Facility, payable quarterly in arrears. MATURITY The New Credit Facility will mature on the fifth anniversary of the closing. SECURITY The New Credit Facility will be secured by a first priority security interest on substantially all of the Company's and its Restricted Subsidiaries' real and personal property of every type and description, whether owned at the time of closing or subsequently acquired, including a pledge of all capital stock of any Restricted Subsidiary of the Company. If in the future the Company's capital stock is beneficially owned or controlled by one or more holding companies, then the lender will require a continuing guaranty from the holding company, which guaranty must be secured by all the assets of the holding company, including a pledge of all the Company's capital stock. 54 PAYMENT TERMS The New Credit Facility will pay interest only as indicated above until maturity. Upon maturity, principal and all remaining accrued interest will be payable. The Company may prepay any borrowings under the New Credit Facility at any time (subject to any applicable LIBOR breakage costs; see "-- Interest" above). COVENANTS The New Credit Facility will contain covenants and provisions that will restrict, among other things, the Company's ability to: (i) incur additional indebtedness; (ii) incur liens on its property; (iii) make investments; (iv) enter into guarantees and other contingent obligations; (v) merge or consolidate with or acquire another person or engage in other fundamental changes; (vi) engage in certain sales of assets; (vii) engage in certain transactions with affiliates; and (viii) make restricted junior payments. The New Credit Facility will also require maintenance of a specified ratio of indebtedness to consolidated cash flow on a trailing twelve month basis and will require the repayment of loans under the New Credit Facility with proceeds of certain sales of assets. EVENTS OF DEFAULT The New Credit Facility will contain events of default customary for working capital financings. DESCRIPTION OF THE NOTES GENERAL The Notes will be issued pursuant to an Indenture (the "Indenture") between the Company and American Bank National Association, as trustee (the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of certain provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. A copy of the proposed form of Indenture described below will be made available to prospective investors upon request. The definitions of certain terms used in the following summary are set forth below under "-- Certain Definitions." PRINCIPAL, MATURITY AND INTEREST The Notes will be unsecured general obligations of the Company, limited in aggregate principal amount to $110,000,000. The Notes will mature on October 1, 2005. Interest on the Notes will accrue at the rate of 10.75% per annum and will be payable semiannually on April 1 and October 1 of each year, commencing April 1, 1996, to holders of record ("Holders") on the immediately preceding March 15 and September 15. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes will be payable as to principal, premium, if any, and interest at the office or agency of the Company maintained for such purpose within the City and State of New York or, in certain circumstances set forth in the Indenture, payment of interest may be made by check mailed to the Holders of the Notes at their respective addresses set forth in the register of Holders of Notes. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the Trustee maintained for such purpose. The Notes will be issued in registered form, without coupons, and in denominations of $1,000 and integral multiples thereof. OPTIONAL REDEMPTION Except as set forth in the next paragraph, the Notes will not be redeemable at the Company's option prior to October 1, 2000. Thereafter, the Notes will be redeemable at the option of the Company, in whole 55 or in part, upon not less than 30 nor more than 60 days notice, at the following redemption prices (expressed as percentages of principal amount) if redeemed during the twelve-month period beginning on October 1 of the years indicated below:
REDEMPTION YEAR PRICE - ---------------------------------------------------------------------- ------------ 2000.................................................................. 105.375% 2001.................................................................. 103.583% 2002.................................................................. 101.791%
and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest to the redemption date. Notwithstanding the foregoing, at any time prior to October 1, 1998, the Company may redeem up to $33.0 million principal amount of the Notes with the proceeds of one or more Public Equity Offerings at 110.75% of the aggregate principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption; PROVIDED that such redemption shall occur within 60 days of the date of the closing of any such Public Equity Offering; AND FURTHER PROVIDED that Notes having an aggregate principal amount of at least $77.0 million remain outstanding immediately after any such redemption. SELECTION AND NOTICE If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate, PROVIDED that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. MANDATORY REDEMPTION The Company will not be required to make mandatory redemption or sinking fund payments with respect to the Notes. RANKING The indebtedness evidenced by the Notes will be unsecured senior obligations of the Company and will rank PARI PASSU in right of payment with all existing and future senior Indebtedness of the Company and senior in right of payment to any future subordinated Indebtedness of the Company. The Notes, however, will be effectively subordinated to senior secured Indebtedness of the Company with respect to the assets securing such Indebtedness, including any Indebtedness that may be incurred from time to time under the New Credit Facility. See "Risk Factors -- Effective Subordination of Notes in Certain Circumstances." As of May 31, 1995, after giving effect to the sale of the Notes and the application of net proceeds to repay certain Indebtedness, the Company would have had $0.2 million of senior Indebtedness outstanding (other than the Notes) and no subordinated Indebtedness outstanding and would have had, subject to certain restrictions, the ability to draw up to $23.7 million of the $35.0 million committed under the New Credit Facility. See "Capitalization." REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash 56 equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company will mail a notice to each Holder stating: (1) that the Change of Control Offer is being made pursuant to the covenant entitled "Offer to Repurchase Upon Change of Control" and that all Notes tendered will be accepted for payment; (2) the purchase price and the purchase date, which will be no earlier than 30 days nor later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"); (3) that any Note not tendered will continue to accrue interest; (4) that, unless the Company defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have such Notes purchased; and (7) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes in connection with a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of the Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so accepted the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; PROVIDED that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Company will send to the Trustee and the Holders on or as soon as practicable after the Change of Control Payment Date a notice setting forth the results of the Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the Company's assets. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of Notes to require the Company to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company to another person may be uncertain. In the event of a Change of Control, there can be no assurance that the Company would have sufficient funds to pay the repurchase price for Notes tendered by the holders thereof. In addition, a Change of Control would constitute a default under the New Credit Facility and, since Indebtedness under the New Credit Facility will effectively rank senior in priority to Indebtedness under the Notes, the Company would be obligated to repay Indebtedness under the New Credit Facility in advance of Indebtedness under the Notes. See "Risk Factors -- Effective Subordination of Notes in Certain Circumstances." The Company's repurchase of Notes as a result of the occurrence of a Change of Control may be prohibited or limited by, or create an event of default under, the terms of other agreements relating to borrowings which the Company may enter into from time to time, including agreements relating to secured Indebtedness. Failure by the Company to make or consummate a Change of Control Offer 57 would constitute an immediate Event of Default under the Indenture, thereby entitling the Trustee or holders of at least 25% in principal amount of the then outstanding Notes to declare all of the Notes to be due and payable immediately; PROVIDED that so long as any Indebtedness permitted to be incurred pursuant to the New Credit Facility is outstanding, such acceleration shall not be effective until the earlier of (i) an acceleration of any such Indebtedness under the New Credit Facility or (ii) five business days after receipt by the Company of written notice of such acceleration. In the event all of the Notes are declared due and payable, the Company's ability to repay the Notes would be subject to the limitations referred to above. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring. "CHANGE OF CONTROL" as used herein, means (a) any sale, lease, exchange or transfer (in one transaction or in a series of related transactions) of all or substantially all the assets of the Company to any Person or group of related Persons (other than Permitted Investors), (b) the merger or consolidation of the Company with or into another corporation or the merger of another corporation into the Company with the effect that immediately after such transaction the stockholders of the Company immediately prior to such transaction hold less than 50% of the total voting power of all securities generally entitled to vote in the election of directors, managers or trustees of the Person surviving such merger or consolidation, (c)(x) prior to the Company's first Public Equity Offering, the acquisition by any "person" or "group" (as those terms are used in Sections 13(d) and 14(d) of the Exchange Act (other than the Permitted Investors) of the ultimate "beneficial ownership" as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of the voting power of all securities of the Company generally entitled to vote in the election of directors of the Company and (y) after the Company's first Public Equity Offering, the acquisition by any person or group (defined as set forth in clause (x) above) (other than the Permitted Investors) of more than the greater of (i) 40% of the voting power of all securities of the Company generally entitled to vote in the election of directors of the Company or (ii) the total percentage of the voting power of all securities of the Company generally entitled to vote in the election of directors of the Company held by the Permitted Investors in the aggregate at the time of determination, (d) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors of the Company, or (e) the stockholders of the Company shall approve any plan for the liquidation or dissolution of the Company. "PERMITTED INVESTORS" means Jack L. Watts, Chase Manhattan Capital Corporation, Fleming Mercantile Investment Trust PLC, Fleming American Investment Trust PLC, LJL Cordovan Investors and Related Parties of any of the foregoing. "RELATED PARTY" with respect to any Permitted Investor means (A) any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Permitted Investor or (B) a trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Permitted Investor and/or such other persons referred to in the immediately preceding clause (A). ASSET SALES The Indenture will provide that the Company will not conduct, and will not permit any of its Restricted Subsidiaries to conduct, an Asset Sale (as defined below) unless (x) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee prior to the consummation of the Asset Sale) of the assets sold or otherwise disposed of, and (y) at least 80% of the consideration therefor received by the Company or 58 such Restricted Subsidiary is in the form of cash or Cash Equivalents; PROVIDED, HOWEVER, that the amount of (A) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto), of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes or the Subsidiary Guarantees, if any, that are assumed by the transferee of any such assets, and (B) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are immediately converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Within 180 days after any Asset Sale, the Company may apply the Net Proceeds from such Asset Sale at its option (a) to permanently reduce debt outstanding under the Credit Facility (and to make corresponding reductions to the commitments in respect thereof) or (b) to make an investment in a business or capital expenditure or other long-term assets of the Company or its Restricted Subsidiaries. Pending the final application of any such Net Proceeds, the Company may invest such Net Proceeds in Cash Equivalents. Any Net Proceeds from the Asset Sale that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, even if Notes less than the Excess Proceeds are tendered for purchase, the amount of Excess Proceeds shall be reset to zero. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any property or assets of the Company or any Restricted Subsidiary (including by way of a sale-and-leaseback) other than sales of inventory (including equipment held as inventory) and obsolete equipment or redundant properties in the ordinary course of business consistent with past practice (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company will be governed by the provisions of the Indenture described above under the caption "-- Change of Control" and/or the provisions described below under the caption "-- Merger, Consolidation or Sale of Assets" and not by the provisions of this covenant), or (ii) the issuance of Equity Interests by any of its Restricted Subsidiaries, or the sale of Equity Interests by the Company or any of its Restricted Subsidiaries in any of its Subsidiaries, in the case of either clause (i) above or this clause (ii), whether in a single transaction or a series of related transactions, (a) that have an aggregate fair market value in excess of $250,000, or (b) for aggregate net proceeds in excess of $250,000. For purposes of this definition, the term "Asset Sale" shall not include any issuance of Equity Interests by the Company, any transfer of assets permitted pursuant to the covenant entitled "Restricted Payments" or pursuant to clause (d) or (e) of the definition of "Permitted Investments" or the transfer of assets or Equity Interests by the Company to a Restricted Subsidiary of the Company or by a Restricted Subsidiary of the Company to the Company or to another Restricted Subsidiary of the Company. CERTAIN COVENANTS RESTRICTED PAYMENTS The Indenture will provide that the Company will not, and, will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the person making such dividend or distribution, or dividends or distributions payable to the Company or any Restricted Subsidiary); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any Restricted Subsidiary or other Affiliate of the Company (other than any such Equity Interests owned by 59 the Company or any Restricted Subsidiary of the Company or except in connection with a Permitted Investment made pursuant to clause (d) or (e) of the definition thereof); (iii) purchase, redeem, repay, defease, pay any amount of principal of or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes prior to the scheduled principal payment, sinking fund payment or maturity thereof; (iv) make any Investment in any Person (other than Permitted Investments) or (v) guarantee any Indebtedness of any Affiliate of the Company other than a Restricted Subsidiary of the Company or pursuant to a Guarantee that constitutes a Permitted Investment pursuant to clause (d) or clause (e) of the definition thereof (all such payments and other actions set forth in clauses (i) through (v) above being collectively referred to as "Restricted Payments"), unless, at the time of such Restricted Payment and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b) the Company and its Restricted Subsidiaries would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock;" and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the Indenture (including Restricted Payments permitted by the next succeeding paragraph), is less than the sum, without duplication, of (i) 50% of the cumulative Consolidated Net Income of the Company for the period (taken as one accounting period) from the date of the Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a loss, 100% of such loss), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the date of the Indenture of Equity Interests of the Company or of debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or convertible debt securities) sold to a Subsidiary of the Company and other than Disqualified Stock or debt securities that have been converted into Disqualified Stock), plus (iii) 100% of any dividends or interest actually received in cash by the Company or a Restricted Subsidiary that is a Guarantor after the date of the Indenture from an Unrestricted Subsidiary, a Person that is not a Subsidiary or a Person that is accounted for on the equity method plus (iv) $5.0 million. The foregoing provisions will not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock), PROVIDED, that the amount of any such net cash proceeds used therefor shall be excluded from clause (c)(ii) of the preceding paragraph to the extent otherwise included therein; (iii) the defeasance, redemption or repurchase of subordinated Indebtedness with the net proceeds from an incurrence of Permitted Refinancing Indebtedness or in exchange for or out of the proceeds of a substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Disqualified Stock) or upon the conversion of subordinated Indebtedness into Equity Interests of the Company (other than Disqualified Stock), PROVIDED, that the amount of any such net cash proceeds used therefor shall be excluded from clause (c)(ii) of the preceding paragraph to the extent otherwise included therein; (iv) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any management equity subscription agreement or stock option agreement in effect as of the date of the Indenture or entered into thereafter in the ordinary course of business; PROVIDED, HOWEVER, that the aggregate price 60 paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $1.0 million, plus the aggregate cash proceeds received by the Company from any reissuance of Equity Interests by the Company to members of management of the Company and its Subsidiaries; and no Default or Event of Default shall have occurred and be continuing immediately after such transaction. For purposes of the preceding sentence, payment of the option exercise price of stock options held by members of management by the tender of shares of the Company's common stock shall not be deemed to constitute a repurchase, redemption, acquisition or retirement of Equity Interests held by members of management. A tender of the Company's common stock by members of management in payment of withholding taxes shall be a repurchase, redemption, acquisition or retirement of Equity Interests held by members of management only to the extent that the amount of withholding taxes the Company pays on behalf of such member of management exceeds the reduction in the Company's state and federal taxes caused by the exercise of the stock option to which the withholding payment relates. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated made on or after the date of the Indenture will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such Investments will be deemed to constitute Investments in an amount equal to the greatest of (x) the net book value of such Investments at the time of such designation, (y) the fair market value of such Investments at the time of such designation and (z) the original fair market value of such Investments at the time they were made. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed, which calculations may be based upon the Company's latest available financial statements. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK The Indenture will provide that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; PROVIDED, HOWEVER, that the Company or any Subsidiary may incur Indebtedness or the Company may issue shares of Disqualified Stock if: (i) the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.00 to 1.0 if such Indebtedness is incurred or such Disqualified Stock is issued, after giving pro forma effect to the incurrence or issuance thereof, on or before October 1, 1997 or at least 2.25 to 1.00 if such Indebtedness is incurred or such Disqualified Stock is issued after October 1, 1997; and (ii)if such Indebtedness is subordinated in right of payment to the Notes, the final stated maturity of such Indebtedness is later than the final stated maturity of the Notes and the Weighted Average Life to Maturity of such Indebtedness is greater than the remaining Weighted Average Life to Maturity of the Notes. The foregoing limitations will not apply to the incurrence by the Company or its Subsidiaries of Permitted Indebtedness, which means: (a) The Notes or any Subsidiary Guarantee; 61 (b) the incurrence by the Company of Indebtedness under the Credit Facility (and guarantees thereof by the Company's Restricted Subsidiaries) in an aggregate principal amount at any time outstanding not to exceed the greater of (i) $35.0 million or (ii) the Borrowing Base, less (y) the aggregate amount of all Net Proceeds of Asset Sales applied to reduce permanently the commitment with respect to such Indebtedness pursuant to the covenant described under the caption "Asset Sales" and (z) the aggregate principal amount of mortgage financing incurred pursuant to clause (l) below to the extent not repaid from operating cash flow; (c) any Indebtedness of the Company and its Restricted Subsidiaries (other than under the Credit Facility and the Notes) in existence on the date of original issuance of the Notes (after giving effect to the application of the net proceeds of the sale of the Notes); (d) the incurrence of Indebtedness by the Company or its Restricted Subsidiaries pursuant to letters of credit in an aggregate principal amount not to exceed $1.0 million (such letters of credit being deemed to have a principal amount equal to the maximum potential liability thereunder); (e) the incurrence by the Company or its Restricted Subsidiaries of Indebtedness pursuant to letters of credit or Guarantees for the benefit of Persons in which the Company or a Restricted Subsidiary may make Permitted Investments pursuant to clause (d) or clause (e) of the definition thereof, provided that for purposes of calculating the amount permitted to be invested pursuant to such clause (d) or (e), any such letter of credit or Guarantee shall be deemed to represent an Investment in such Person by the Company or Restricted Subsidiary in the amount of the maximum potential liability thereunder; (f) the incurrence by the Company or its Restricted Subsidiaries of Indebtedness which also constitutes an Investment permitted to be made under the covenant entitled "Restricted Payments"; (g) the incurrence by the Company or its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financing or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Restricted Subsidiary in an aggregate principal amount not to exceed $1.0 million at any one time outstanding; (h) intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; (i) the incurrence by the Company or its Restricted Subsidiaries of (i) Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the Indenture to be outstanding; (ii) Currency Agreements and (iii) Commodity Agreements; (j) the incurrence of Permitted Refinancing Indebtedness by the Company or its Restricted Subsidiaries in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by the Indenture to be incurred; (k) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; (l) the incurrence by the Company or its Restricted Subsidiaries of mortgage financing used to acquire headquarters, manufacturing and/or warehouse facilities leased by the Company on the Issuance Date (as well as certain real property adjacent thereto) located in San Jose, California in an aggregate principal amount not to exceed $7.0 million; and 62 (m) the incurrence of Indebtedness by the Company or its Restricted Subsidiaries (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding not to exceed $5.0 million. For purposes of the foregoing provision, the cash flow generated by any Person, business, property or asset acquired during the immediately preceding four fiscal quarter period (or subsequent to the end thereof and on or prior to the Calculation Date) shall be determined on the same basis provided in the definition of Consolidated Cash Flow plus there shall be taken into account, to the extent permitted by GAAP (and Regulation S-X under the Securities Act and interpretations thereof by the staff of the Commission) (y)(i) the savings in cost of sales reasonably expected to result from the acquisition of such Person, business, property or assets and (ii) other savings in or eliminations of selling and distribution expenses and general and administrative expenses reasonably expected to result from the acquisition of such Person, business, property or assets, minus (z) the incremental expenses that reasonably would be expected to be included in cost of sales, selling and distribution expenses and general and administrative expenses as a result of the operation of the acquired Person, business, property or assets by the Company and its Restricted Subsidiaries. In addition, for purposes of the Fixed Charge Coverage Ratio test set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock," Consolidated Cash Flow and Fixed Charges shall be calculated after giving effect on a pro forma basis for the period of such calculation to the incurrence of any Indebtedness at any time during the period commencing on the first day of the four full fiscal quarter period that precedes the Calculation Date and ending on and including the Calculation Date (and that is outstanding on the Calculation Date), including without limitation the incurrence of the Indebtedness giving rise to the need to make such calculation, in each case as if such incurrence occurred and the proceeds therefrom had been applied on the first day of such four full fiscal quarter period. Further, for purposes of the Fixed Charge Coverage Ratio test set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock," Consolidated Interest Expense attributable to any Indebtedness (whether existing or being incurred) bearing a floating interest rate shall be computed on a pro forma basis at an assumed rate equal to the higher of (i) the actual rate in effect on the date of computation under the instrument governing such Indebtedness, or (ii) the average of the floating rate for such Indebtedness for the one-year period immediately prior to the date of computation, as if such assumed rate had been the applicable rate for the entire period. NEGATIVE PLEDGE The Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien, other than Permitted Liens, on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom, unless all payments due under the Indenture and the Notes (including any Subsidiary Guarantee thereof given by such Restricted Subsidiary) are secured by a Lien on such property that is (i) equal and ratable with such Lien or (ii) in the case of Indebtedness which is subordinated in right of payment to the Notes (or such Subsidiary Guarantee), the Notes (or such Subsidiary Guarantee) are secured by a Lien on such asset that is senior to such Lien. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (a)(i) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or participation in, or measured by, its profits, or (ii) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (b) make loans or advances to the Company or any of its Restricted Subsidiaries or (c) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reasons of (i) indebtedness as in effect on the date of the Indenture, (ii) the Credit Facility as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, 63 refundings, replacements or refinancings thereof, PROVIDED that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive with respect to such dividend and other payment restrictions than those contained in the Credit Facility as in effect on the date of the Indenture, (iii) the Indenture and the Notes, (iv) applicable law, (v) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, PROVIDED that the Consolidated Cash Flow of such Person is not taken into account in determining whether such acquisition was permitted by the terms of the Indenture, (vi) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (vii) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (c) above on the property so acquired, (viii) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (ix) encumbrances or restrictions arising under Liens created pursuant to clause (g) of the definition of Permitted Liens, or (x) the Subsidiary Guarantees (if any). MERGER, CONSOLIDATION, OR SALE OF ASSETS The Indenture will provide that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately before and, on a PRO FORMA basis, immediately after giving effect to such transaction no Default or Event of Default exists; (iv) the Company or any entity or Person formed by or surviving any such consolidation or merger, or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (A) will have Consolidated Net Worth (immediately after the transaction but prior to any purchase accounting adjustments resulting from the transaction) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (B) will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock;" and (v) the Company shall have delivered to the Trustee an officers' certificate that items (i) to (iv) have been satisfied and a legal opinion as to certain legal matters. TRANSACTIONS WITH AFFILIATES The Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (b) the Company delivers to the Trustee (i) with respect to any Affiliate Transaction involving aggregate payments in excess of $2.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and such Affiliate Transaction is approved by a 64 majority of the members of the Board of Directors and (ii) with respect to any Affiliate Transaction involving aggregate payments in excess of $5.0 million, an opinion as to the fairness to the Company or such Restricted Subsidiary from a financial point of view issued by an investment banking firm of national standing; PROVIDED, HOWEVER, that (i) any employment, stock option, stock purchase or stock grant agreement entered into by the Company or any of its Restricted Subsidiaries with officers and employees in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (ii) transactions between or among the Company and/or its Restricted Subsidiaries; (iii) transactions permitted by the provisions of the Indenture described above under the covenant "Restricted Payments" or pursuant to clause (d) or (e) of the definition of "Permitted Investments"; and (iv) loans and advances to officers and employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business in an amount not to exceed $1.5 million at any one time outstanding, in each case, shall not be deemed Affiliate Transactions. SUBSIDIARY GUARANTEES As of the date of the Indenture, no Subsidiary of the Company or other business entity in which the Company owns an interest will act as a Guarantor in respect of the Notes or will be required to do so under the terms of the Indenture, and the Company does not presently anticipate that any Subsidiaries or other business entities will guarantee the Notes following completion of this offering. However, if in the future a "Restricted Subsidiary" of the Company exists with assets, businesses, divisions, real property or equipment having an aggregate fair market value (as determined in good faith by the Board of Directors) in excess of $100,000, it will be required under the Indenture to execute and deliver to the Trustee a supplemental indenture in form and substance reasonably satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall jointly and severally guarantee all of the Company's obligations under the Notes (each, a "Subsidiary Guarantee") and to deliver an opinion of counsel as to certain legal matters, in accordance with the terms of the Indenture. The Company will furnish financial information with respect to such Restricted Subsidiary in accordance with the Company's reporting requirements under the Indenture and the Securities Exchange Act of 1934, as amended. The obligations of a Guarantor under its Subsidiary Guarantee will be limited so as not to constitute a fraudulent conveyance under applicable law. The Indenture will provide that no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another Person, whether or not affiliated with such Guarantor (other than the Company or a Restricted Subsidiary of the Company that is a Guarantor), unless (i) the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all obligations of such Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under its Subsidiary Guarantee, the Notes and the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; and (iii) such Guarantor, or any Person formed by or surviving any such consolidation or merger, (A) would have Consolidated Net Worth (immediately after giving effect to such transaction but prior to any purchase accounting adjustments resulting from the transaction), equal to or greater than the Consolidated Net Worth of such Guarantor immediately preceding the transaction and (B) the Company would be permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio to incur, immediately after giving effect to such transaction, at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock." The Indenture will provide that in the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, then such Guarantor (in the event of a sale or other disposition of all of the capital stock of such Guarantor) or the corporation acquiring the assets (in the event of a sale or other disposition of all of the assets, by way of merger, consolidation or otherwise, of such Guarantor) will be released and relieved of any obligations under its Subsidiary Guarantee; PROVIDED that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture. See "Repurchase the Option of Holders -- Asset Sales." 65 The Company presently conducts all of its business directly, other than business conducted through Portola Packaging Canada Ltd. and Cap Snap (U.K.) Ltd., each of which is being designated as an "Unrestricted Subsidiary" as of the date of the Indenture, and the Company's Mexican joint venture, which does not presently qualify as a "Subsidiary" for purposes of the Indenture. In the event that the Mexican joint venture becomes a Subsidiary, it is expected that the resulting entity would be immediately designated as an "Unrestricted Subsidiary" for purposes of the Indenture. Accordingly, none of the foregoing entities is acting or is expected to act as a Guarantor of the Notes, and each of them is not subject to many of the restrictive covenants set forth in the Indenture. The Company presently intends to conduct its business either directly, through Unrestricted Subsidiaries or through joint ventures that do not qualify as Subsidiaries, although the Indenture has been structured to permit the Company to form Restricted Subsidiaries subject to compliance with certain requirements, including the execution and delivery by a Restricted Subsidiary of a Subsidiary Guarantee under the circumstances described above. REPORTS Whether or not required by the rules and regulations of the Securities and Exchange Commission (the "Commission"), so long as any Notes are outstanding, the Company (and any Guarantor, if applicable) will furnish to the Trustee and to the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Company and its Subsidiaries on a consolidated basis and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company (and/or any Guarantor, if applicable) were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports, and any other information required by Section 13 or 15(d) of the Exchange Act, with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. Concurrently with the delivery of the reports required to be delivered pursuant to the preceding paragraph, the Company shall deliver to the Trustee and to each Holder annual and quarterly financial statements with appropriate footnotes of the Company and its Restricted Subsidiaries, all prepared and presented in a manner substantially consistent with those of the Company and its Subsidiaries on a consolidated basis required by the preceding paragraph. EVENTS OF DEFAULT AND REMEDIES The Indenture will provide that each of the following constitutes an Event of Default: (i) default for 30 days in the payment when due of interest on the Notes; (ii) default in payment when due of the principal or of premium, if any, on the Notes; (iii) failure by the Company to make or consummate a Change of Control Offer or an Asset Sale Offer or to comply with the provisions described under the covenants "Restricted Payments," "Incurrence of Indebtedness and Issuance of Preferred Stock" and "Merger, Consolidation or Sale of Assets;" (iv) failure by the Company or a Restricted Subsidiary for 60 days after notice from the Trustee or the holders of at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in the Indenture or the Notes or of any Guarantor to perform any of its other covenants under its Subsidiary Guarantee; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any Restricted Subsidiary) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness 66 under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $2.0 million or more; (vi) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $2.0 million, which judgments are not paid, discharged, bonded or stayed for a period of 60 days; (vii) any Holder of at least $2.0 million of secured Indebtedness of the Company or secured Indebtedness of any Restricted Subsidiary, after a default with respect to such secured Indebtedness, shall commence proceedings or take any action to retain or collect, in satisfaction of such secured Indebtedness, assets of the Company or any Restricted Subsidiary having a fair market value in excess of $2.0 million; (viii) any Subsidiary Guarantee of a Significant Subsidiary (or group of Subsidiaries that, taken together, constitutes a Significant Subsidiary) shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor that is a Significant Subsidiary (or group of Guarantors that, taken together, constitute a Significant Subsidiary), or any Person acting on behalf of any such Guarantor or Guarantors, shall deny or disaffirm its obligations under its Subsidiary Guarantee; or (ix) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately; provided, that so long as any Indebtedness permitted to be incurred pursuant to the Credit Facility shall be outstanding, such acceleration shall not be effective until the earlier of (i) an acceleration of any such Indebtedness under the Credit Facility or (ii) five business days after receipt by the Company of written notice of such acceleration. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary, all outstanding Notes will become due and payable without further action or notice. Under certain circumstances, the Holders of at least a majority in principal amount of the outstanding Notes may rescind any acceleration with respect to the Notes and its consequences. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company or a Guarantor, as such, shall have any liability for any obligations of the Company or such Guarantor under the Notes, the Indenture or a Subsidiary Guarantee or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its and the Guarantors' obligations discharged with respect to the outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due, (ii) the Company's and the Guarantors' obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's and the Guarantors' obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, 67 elect to have the obligations of the Company and the Guarantors released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in United States dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the incurrence of Indebtedness all or a portion of which will be used to defease the Notes pursuant to the Indenture concurrently with such incurrence) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company or the Guarantors, if any, with the intent of defeating, hindering, delaying or defrauding creditors of the Company or any such Guarantors; and (viii) the Company shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel as to matters of law, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Note selected for redemption. Also, the Company is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be treated as the owner of such Note for all purposes. 68 AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next succeeding paragraphs, the Company and the Trustee may amend or supplement the Indenture or the Notes with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange offer for Notes), and any existing default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder of Notes): (i) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to the covenants described above under the caption "Repurchase at the Option of Holders"), (iii) reduce the rate of or change the time for payment of interest on any Note, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration), (v) make any Note payable in money other than that stated in the Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults, waiver of certain covenants, supplemental indentures requiring the consent of Holders, or the rights of Holders of Notes to receive payments of principal of or premium, if any, or interest on the Notes, (vii) waive a redemption or purchase payment with respect to any Note (other than a payment required by one of the covenants described above under the caption "Repurchase at the Option of Holders"), (viii) impair the right of any Holder to institute suit for the enforcement of any payment under any Note after the maturity thereof; (ix) release any Guarantor other than in accordance with the Indenture, or change any Guarantee in any manner that would adversely affect the Holders, or (x) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Notes, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for any supplemental indenture required by the covenant described under the caption "Subsidiary Guarantees," to provide for the assumption of the Company's obligations to Holders of the Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, the Guarantors or any Affiliate of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent person in the conduct of his or her own affairs. Subject to such provisions, 69 the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture without charge by writing to Portola Packaging, Inc., 890 Faulstich Court, San Jose, California 95112, Attention: Robert Strickland, Chief Financial Officer. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "ACQUIRED DEBT" means, with respect to any specified Person: (i) Indebtedness of any other Person existing at the time such other Person merged with or into or became a Subsidiary of such specified Person, including Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person and (ii) Indebtedness encumbering any asset acquired by such specified Person. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "BORROWING BASE" means, as of any date, an amount equal to the sum of (a) 85% of the Eligible Accounts owned by the Company and its Restricted Subsidiaries, (b) 60% of the Eligible Inventory owned by the Company and its Restricted Subsidiaries and (c) 40% of the Eligible PPE owned by the Company and its Restricted Subsidiaries, PROVIDED, that the Borrowing Base shall be adjusted to give pro forma effect to the acquisition of any Person, property or assets by the Company or by any Restricted Subsidiary of the Company that is a Guarantor, so long as (i) such acquisition is consummated on or prior to the date of calculation of the Borrowing Base and (ii) in the case of an acquisition of a Person, such Person (y) becomes a Restricted Subsidiary of the Company and a Guarantor or (z) is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company that is a Guarantor. "CALCULATION DATE" means the date on which the calculation of the Fixed Charge Coverage Ratio is made. "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be so required to be capitalized on the balance sheet in accordance with GAAP. "CAPITAL STOCK" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, including, without limitation, with respect to partnerships, partnership interests (whether general or limited) and any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, such partnership. "CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the Credit Agreement or with any domestic commercial bank having capital and surplus in excess of $500 million, (iv) repurchase obligations with a term of not more than seven days for 70 underlying securities of the types described in clauses (ii) and (iii) entered into with any financial institution meeting the qualifications specified in clause (iii) above and (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition. "COMMODITY AGREEMENT" means any commodity futures contract, commodity option or other similar agreement or arrangement entered into by the Company or any Subsidiary designed to protect the Company or any of its Subsidiaries against fluctuations in the price of commodities actually used in the ordinary course of business of the Company and its Subsidiaries. "CONSOLIDATED CASH FLOW" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (a) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing Consolidated Net Income), plus (b) provision for taxes based on income or profits of such Person for such period, to the extent such provision for taxes was included in computing Consolidated Net Income, plus (c) consolidated interest expense of such Person for such period, whether paid or accrued and whether or not capitalized (including amortization of original issue discount, non-cash interest payments and the interest component of any payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred with respect to letters of credit and bankers' acceptance financing and net payments (if any) pursuant to Hedging Obligations), to the extent such expense was deducted in computing Consolidated Net Income, plus (d) depreciation, amortization (including amortization of goodwill and other intangibles) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person for such period to the extent such depreciation, amortization and other non-cash charges were deducted in computing Consolidated Net Income, plus (e) all amounts accrued or paid on or prior to the Issuance Date in respect of litigation costs incurred by the Company pursuant to the conduct of its patent infringement litigation with Scholle Corporation, in each case, on a consolidated basis and determined in accordance with GAAP. "CONSOLIDATED NET INCOME" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP, PROVIDED, that (i) the Net Income of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be excluded, whether or not distributed to the Company or one of its Subsidiaries, (ii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries, and (iv) the cumulative effect of a change in accounting principles shall be excluded. "CONSOLIDATED NET WORTH" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Restricted Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the date of the Indenture in the book value of any asset owned by such Person or a consolidated Restricted Subsidiary of such Person, and (y) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "CREDIT FACILITY" means that certain Second Amended and Restated Credit and Security Agreement, dated as of October 2, 1995 by and among the Company and Heller Financial, Inc., providing for credit 71 borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time (regardless of whether Heller Financial, Inc. or any Affiliate thereof is a lender thereunder). "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuation in the values of the currencies of the countries (other than the United States) in which the Company or its Subsidiaries conduct business. "DEFAULT" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to a date that is one year after the date on which the Notes mature. "ELIGIBLE ACCOUNTS" has the meaning assigned to such term in the Second Amended and Restated Credit and Security Agreement dated October 2, 1995 between the Company and Heller Financial, Inc., as in effect on the Issuance Date, PROVIDED that references to "Agent" in the definition of such term shall include any agent performing similar functions under a successor credit facility. "ELIGIBLE INVENTORY" has the meaning assigned to such term in the Second Amended and Restated Credit and Security Agreement dated October 2, 1995 between the Company and Heller Financial, Inc., as in effect on the Issuance Date, PROVIDED that references to "Agent" in the definition of such term shall include any agent performing similar functions under a successor credit facility. "ELIGIBLE PPE" has the meaning assigned to such term in the Second Amended and Restated Credit and Security Agreement dated October 2, 1995 between the Company and Heller Financial, Inc., as in effect on the Issuance Date, PROVIDED that references to "Agent" in the definition of such term shall include any agent performing similar functions under a successor credit facility. "EQUITY INTERESTS" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for Capital Stock). "FIXED CHARGES" means, with respect to any Person for any period, the sum of (a) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, to the extent such expense was deducted in computing Consolidated Net Income (including amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations and net payments (if any) pursuant to Hedging Obligations), (b) commissions, discounts and other fees and charges incurred with respect to letters of credit and bankers' acceptances financing, (c) consolidated interest expense of such person and its Restricted Subsidiaries that was capitalized during such period, (d) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or any of its Restricted Subsidiaries or secured by a Lien on assets of such Person or any of its Restricted Subsidiaries (other than on the Capital Stock of Unrestricted Subsidiaries) and (e) preferred stock dividend requirements on any series of preferred stock of such Person or any of its Restricted Subsidiaries times a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person and its Restricted Subsidiaries, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period (exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and businesses disposed of prior to the Calculation Date) to the Fixed Charges of such Person and its 72 Restricted Subsidiaries for such period (exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and businesses disposed of prior to the Calculation Date, but only to the extent that the obligations giving rise to such Fixed Charges would no longer be obligations contributing to such Person's Fixed Charges subsequent to the Calculation Date). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "GUARANTEE" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness, "GUARANTOR" means each subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture, and its respective successors and assigns. "HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "INDEBTEDNESS" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. "INVESTMENTS" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of loans (including Guarantees), letters of credit (or reimbursement agreements in respect thereof), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), or purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "ISSUANCE DATE" means the closing date for the sale and original issuance of the Notes. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "NET INCOME" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant 73 to sale and leaseback transactions), or (b) the disposition of any securities or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries, and (ii) all extraordinary gains or losses (together with any related tax provision pertaining to such extraordinary items). "NET PROCEEDS" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale, net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets. "NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness, other than Indebtedness the incurrence of which also constitutes an Investment permitted to be made under the covenant entitled "Restricted Payments" or pursuant to clause (d) or (e) of the definition of "Permitted Investments"), (b) is directly or indirectly liable (as a guarantor or otherwise, other than pursuant to a Guarantee which also constitutes an Investment permitted to be made under the covenant entitled "Restricted Payments" or pursuant to clause (d) or (e) of the definition of "Permitted Investments"), or (c) constitutes the lender, other than pursuant to loans that also constitute an Investment permitted to be made under the covenant entitled "Restricted Payments" or pursuant to clause (d) or (e) of the definition of "Permitted Investments"; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries (other than the capital stock of one or more Unrestricted Subsidiaries). "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "PERMITTED INVESTMENTS" means (a) any Investments in the Company or in a Restricted Subsidiary of the Company that is a Guarantor; (b) any Investments in Cash Equivalents; (c) Investments by the Company or any Subsidiary of the Company in a Person, if as a result of such Investments (i) such Person becomes a Restricted Subsidiary of the Company and a Guarantor, or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company that is a Guarantor; (d) any Investments made on or after the Issuance Date in Persons primarily engaged in the packaging business not to exceed $10.0 million in aggregate amount at any one time outstanding (measured by the fair market value of such Investments as of the date made); and (e) Investments in or on behalf of Portola Packaging Canada Ltd. or any successor thereto in an annual amount not to exceed the lesser of C$1.0 million and U.S.$1.0 million in each of calendar years 1996, 1997 and 1998. For purposes of calculating the aggregate amount of Permitted Investments permitted to be outstanding at any one time pursuant to clause (d) of the preceding sentence, (i) to the extent the consideration for any such Investment consists of Equity Interests (other than Disqualified Stock) of the Company, the value of the Equity Interests so issued will be ignored in determining the amount of such Investment, (ii) the aggregate amount of such Investments made by the Company and its Restricted Subsidiaries on or after the Issuance Date will be decreased (but not below zero) by an amount equal to the lesser of (y) the cash return of capital to the Company or a Restricted Subsidiary with respect to such Investment that is sold for cash or otherwise liquidated or repaid for cash (less, in each case, the cost of disposition, including applicable taxes, if any) and (z) the initial amount of such investment and (iii) in the case of Investments made by issuing letters of credit (or reimbursement agreements in respect thereof), the aggregate amount of such Investments will be decreased by the amount remaining unpaid thereunder upon termination of the Company's (or a Restricted Subsidiary's) obligations thereunder. 74 "PERMITTED LIENS" means (a) purchase money Liens securing trade payables; (b) Liens existing on the date of the Indenture; (c) Liens on assets of Unrestricted Subsidiaries or Liens on Equity Interests in Unrestricted Subsidiaries, in either case, that secure Non-Recourse Debt of Unrestricted Subsidiaries; (d) Liens securing Indebtedness incurred under the Credit Facility in an aggregate principal amount at any time outstanding not to exceed the amount permitted to be incurred under clause (b) of the second paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"; (e) Liens securing Capitalized Lease Obligations or purchase money Indebtedness otherwise permitted under the Indenture; (f) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; PROVIDED that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (g) Liens (including extensions and renewals thereof) upon property or assets (including Equity Interests) acquired after the Closing Date; PROVIDED that (x) such Lien is created solely for the purpose of securing Indebtedness incurred (A) to finance the cost (including the cost of improvement or construction ) of the item of property or assets (including Equity Interests) subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (B) to refinance any Indebtedness previously so secured, (y) the principal amount of Indebtedness secured by such Lien does not exceed 100% of such cost and (z) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements of such item (it being expressly understood and acknowledged that any such Lien may extend to or cover items of property or assets (and any improvements of such items) owned by an entity whose Equity Interests are acquired by the Company or a Restricted Subsidiary and which becomes a Restricted Subsidiary concurrently with such acquisition); and (h) any Lien securing Acquired Debt created prior to (and not created in connection with, or in contemplation of) the incurrence of such Indebtedness by the Company or any Restricted Subsidiary, in each case which Indebtedness is permitted under the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock;" PROVIDED that any such Lien only extends to the assets that were subject to such Lien securing such Acquired Debt prior to the related transaction by the Company or its Restricted Subsidiaries; (i) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar Liens imposed by law that are incurred in the ordinary course of business for sums not more than thirty (30) days delinquent or that are being contested in good faith, provided that a reserve or other appropriate provision shall have been made therefor; (j) Liens (other than Liens imposed under the Employee Retirement Income Security Act of 1974, as amended) incurred or deposits made in the ordinary course of business (including workers' compensation, unemployment insurance, social security, bonds, leases, and other similar obligations) (exclusive of obligations for the payment of borrowed money); (k) deposits, in an aggregate amount not to exceed $500,000, made in the ordinary course of business to secure liabilities to insurance carriers; and (l) easements, rights-of-way, restrictions, and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries and not lessening in any material respect the value of such property being encumbered. At the election of the Company evidenced by a resolution of the Board of Directors of the Company at or prior to the time of acquisition of Equity Interests in an entity which thereupon becomes a Restricted Subsidiary, Permitted Liens created pursuant to clause (g) of this definition may also extend to after-acquired property of such Restricted Subsidiary; PROVIDED, that after such election and for as long as a Lien on such after-acquired property exists, such a Restricted Subsidiary shall be treated, on a pro forma basis after giving effect to any Investment made in connection with such acquisition, as an Unrestricted Subsidiary for purposes of the definition of "Permitted Investments" hereunder. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; PROVIDED that: (1) the principal amount of such indebtedness does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (2) such Indebtedness has a 75 Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) such Indebtedness is subordinated in right of payment to the Notes on terms at least as favorable to the Holders of Notes as those, if any, contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (4) such Indebtedness is incurred by the Company or the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "PUBLIC EQUITY OFFERING" means a bona fide underwritten sale of common stock of the Company pursuant to a registration statement (other than on Form S-8 or any other form relating to securities issuable under any benefit plan of the Company or its Subsidiaries) that is declared effective by the Securities and Exchange Commission. "RESTRICTED SUBSIDIARY" means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X promulgated pursuant to the Securities Act, as such regulation is in effect on the date hereof, except that, for purposes of this definition, all references to "10 percent" in such definition shall be deemed to be references to "five percent." "SUBSIDIARY" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof. "UNRESTRICTED SUBSIDIARY" means (i) Portola Packaging Canada Ltd., Cap Snap (U.K.) Ltd. and any other Subsidiary of the Company which at the time of determination is designated an Unrestricted Subsidiary (as designated by the Board of Directors of the Company as provided below) and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company may designate any Subsidiary as an Unrestricted Subsidiary so long as (a) neither the Company nor any Restricted Subsidiary is directly or indirectly liable for any Indebtedness of such Subsidiary (except as permitted by clause (c) below), (b) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or both) any holder of any Indebtedness of the Company or a Restricted Subsidiary to declare a default on such Indebtedness of the Company or a Restricted Subsidiary or cause the payment thereof to be accelerated or payable prior to the stated maturity of the Notes, if such declaration of default, acceleration or payment would constitute an Event of Default under the Indenture and (c) neither the Company nor any Unrestricted Subsidiary shall have made any loan or advance to or an Investment in such Subsidiary in an amount that, at the date of designation, could not have been made in another Person pursuant to the covenant entitled "Restricted Payments" or pursuant to clause (d) or (e) of the definition of "Permitted Investment" (it being understood that any such loan, advance or Investment existing at the date of designation shall be deemed to be a Restricted Payment or a Permitted Investment under clause (d) or (e) of the definition thereof, as the case may be, made as of such date). Any such designation by the Board of Directors shall be evidenced by a resolution of the Board of Directors filed with the Trustee. The Board of Directors of the Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary at any time in the same manner as it would designate a Subsidiary as an Unrestricted Subsidiary, so long as immediately after such designation as a Restricted Subsidiary, there would be no Default or Event of Default under the Indenture and the Company could incur $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock." "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (y) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding principal amount of such Indebtedness. 76 UNDERWRITING Chase Securities, Inc. ("Chase Securities") and Salomon Brothers Inc (together, the "Underwriters") have each agreed, subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement") between the Company and the Underwriters, to purchase the principal amount of the Notes set forth opposite its name below. Pursuant to the Underwriting Agreement, the Underwriters will be obligated to purchase all of the Notes if they purchase any of them.
UNDERWRITERS PRINCIPAL AMOUNT - ------------------------------------------------------------------------ ---------------- Chase Securities, Inc................................................... $ 77,000,000 Salomon Brothers Inc.................................................... 33,000,000 ---------------- Total................................................................. $ 110,000,000 ---------------- ----------------
The several Underwriters propose to offer the Notes to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of 1.4375% of the principal amount of the Notes. The Underwriters may allow, and such dealers may reallow, a discount not in excess of 0.25% of the principal amount of the Notes to certain other dealers. After the initial public offering, the public price, concession and discount may be changed. There is no public market for the Notes and the Company does not intend to apply for listing of the Notes on any national securities exchange or for quotation of the Notes through Nasdaq. The Company has been advised by the Underwriters that, following the completion of the offering of the Notes, the Underwriters presently intend to make a market in the Notes; however, they are under no obligation to do so and may discontinue any market making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes or that an active public market will develop or, if developed, will continue. If an active public market does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. The Underwriters will not confirm sales of the Notes to any accounts over which they exercise discretionary authority. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company has agreed that, without the prior written consent of Chase Securities, it will not for a period of 180 days after the date of this Prospectus issue or sell debt securities, other than the Notes. Under Schedule E of the By-Laws ("Schedule E") of the National Association of Securities Dealers, Inc. (the "NASD") and under the Rules of Fair Practice of the NASD, when either (i) more than 10% of the proceeds of a public offering of debt securities is to be paid to members of the NASD or affiliates thereof who are participating in the distribution of such securities or (ii) a member of the NASD that participates in the distribution of a public offering of debt securities is deemed to have a "conflict of interest" (as defined in Schedule E) with the issuer of such securities, the yield at which the debt securities are distributed to the public must be no lower than that recommended by a "Qualified Independent Underwriter" as defined in Section 2(o) of Schedule E. Since June 1988, Chase Bank, an affiliate of Chase Securities, has held the Company's Senior Subordinated Notes in the principal amount of $10.0 million. The Senior Subordinated Notes will be repaid in full (together with the applicable prepayment premium) with the proceeds of this offering. Depending on the amount of the prepayment premium related to the Senior Subordinated Notes and the actual expenses incurred by the Company in connection with the offering, Chase Bank may in the aggregate receive more than 10% of the net proceeds from the offering of the Notes. In addition, under Schedule E, Chase Securities is deemed to have a conflict of interest with the Company because Chase Bank owns more than 10% of the Company's outstanding subordinated debt and because Chase Capital, an affiliate of Chase Securities, owns more than 10% of the Company's common equity. Schedule E also provides that, when a member of the NASD that is an affiliate of an issuer of debt securities participates in the distribution of a public offering of such securities, the yield at which the debt securities are distributed to the public must be no lower than that recommended by a Qualified Independent Underwriter. Chase Securities is presumed to be an 77 affiliate of the Company because Chase Capital owns more than 10% of the Company's voting stock. Christopher C. Behrens, a director of the Company, is a Vice President of Chase Bank and Chase Capital. See "Certain Transactions" and "Principal Stockholders." To satisfy the requirements of Schedule E, Salomon Brothers Inc has agreed to act as the Qualified Independent Underwriter in connection with the offering of the Notes. The yield on the Notes, when sold to the public at the public offering price set forth on the cover of the Prospectus, will be no lower than that recommended by Salomon Brothers Inc. As the Qualified Independent Underwriter, Salomon Brothers Inc has performed due diligence with respect to the information contained herein pursuant to the applicable requirements of the NASD and has participated in the preparation of the Registration Statement of which this Prospectus is a part. This Prospectus may be used by Chase Securities in connection with offers and sales related to market making transactions in the Notes. Chase Securities may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of sale. Chase Securities will not confirm such sales to any accounts over which it exercises discretionary authority without the prior specific written approval of the customer. LEGAL MATTERS The legality of the Notes offered hereby will be passed upon for the Company by Fenwick & West, Palo Alto, California. Certain legal matters in connection with the offering of the Notes will be passed upon for the Underwriters by Latham & Watkins, Washington, D.C. EXPERTS The consolidated balance sheets as of August 31, 1993 and 1994 and the consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1994 of the Company included in this Prospectus have been included herein in reliance on the report, which includes an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The combined balance sheet as of August 31, 1993 and the combined statements of income, retained earnings and cash flows for the year then ended of Nepco included in this Prospectus have been included herein in reliance on the report, which includes an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The combined balance sheet as of March 31, 1995 and the combined statements of income, retained earnings and changes in Financial Position for the year then ended of Portola Packaging Canada Ltd. included in this Prospectus have been included herein in reliance on the report of Coopers & Lybrand (Canada), Auditors, given on the authority of that firm as experts in accounting and auditing. The combined balance sheet as of August 31, 1992 and the combined statements of income, retained earnings and cash flows for each of the two years then ended of Nepco included in this Prospectus have been included herein in reliance on the report of Carbis Walker & Associates LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form S-1 under the Securities Act with respect to the Notes offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Notes offered hereby, reference is made to the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement and the exhibits thereto may be inspected without 78 charge at the offices of the Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by the Commission. Under the Indenture, whether or not required by the rules and regulations of the Commission, the Company is required to provide the Holders of the Notes and the Trustee with certain reports, including all quarterly and annual financial information, and management's discussion with respect thereto, that would be required to be contained in filings with the Commission on Forms 10-Q and 10-K if the Company were required to file such forms (and, with respect to the annual information only, a report thereon by the Company's certified independent accountants) and all reports on Form 8-K that would be required to be filed with the Commission if the Company were required to file such reports. In addition, the Indenture requires the Company to file a copy of all such information and reports, and any other information required by Section 13 or 15(d) of the Exchange Act, with the Commission for public availability (unless the Commission will not accept such a filing) and to make such information available to securities analysts and prospective investors upon request. See "Description of the Notes -- Certain Covenants -- Reports." 79 INDEX TO FINANCIAL STATEMENTS
PAGES --------- PORTOLA PACKAGING, INC. AND SUBSIDIARIES Report of Independent Accountants....................................................................... F-2 Consolidated Balance Sheets............................................................................. F-3 Consolidated Statements of Operations................................................................... F-4 Consolidated Statements of Cash Flows................................................................... F-5 Consolidated Statements of Shareholders' Equity......................................................... F-6 Notes to Consolidated Financial Statements.............................................................. F-7 NORTHERN ENGINEERING AND PLASTICS CORPORATION Report of Independent Accountants....................................................................... F-22 Combined Balance Sheets................................................................................. F-24 Combined Statements of Operations....................................................................... F-25 Combined Statements of Retained Earnings................................................................ F-26 Combined Statements of Cash Flows....................................................................... F-27 Notes to Combined Financial Statements.................................................................. F-28 PORTOLA PACKAGING CANADA LTD. Auditor's Report........................................................................................ F-36 Combined Balance Sheet.................................................................................. F-37 Combined Statement of Retained Earnings................................................................. F-38 Combined Statement of Income............................................................................ F-39 Combined Statement of Changes in Financial Position..................................................... F-40 Notes to Combined Financial Statements.................................................................. F-41
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Portola Packaging, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Portola Packaging, Inc. and Subsidiaries as of August 31, 1993 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Portola Packaging, Inc. and Subsidiaries as of August 31, 1993 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, effective September 1, 1993, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes." COOPERS & LYBRAND L.L.P. San Jose, California November 22, 1994, except as to information presented in Notes 9 and 16, for which the date is July 7, 1995. F-2 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31, -------------------- 1993 1994 --------- --------- MAY 31, 1995 ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................................... $ 1,187 $ 2,219 $ 505 Short-term investments...................................................... 1,000 Accounts receivable, net of allowance for doubtful accounts of $206, $389 and $536, respectively..................................................... 8,516 15,626 17,046 Inventories................................................................. 4,840 8,441 11,219 Other current assets........................................................ 608 1,736 962 Deferred income taxes....................................................... 326 738 731 --------- --------- ----------- Total current assets.................................................... 15,477 28,760 31,463 Investments................................................................... 1,000 Notes receivable.............................................................. 312 281 454 Property, plant and equipment, net............................................ 23,993 47,147 48,903 Goodwill, net of accumulated amortization of none, $162 and $987, respectively................................................................. 16,303 15,478 Patents, net of accumulated amortization of $7,100, $8,922 and $10,039, respectively................................................................. 8,712 9,014 7,979 Covenants not to compete, net of accumulated amortization of $142, $313 and $896, respectively........................................................... 158 3,631 3,048 Debt financing costs, net of accumulated amortization of $377, $79 and $439, respectively................................................................. 1,584 2,392 1,949 Other assets.................................................................. 660 2,292.... 3,148 --------- --------- ----------- Total assets............................................................ $ 50,896 $ 110,820 $ 112,422 --------- --------- ----------- --------- --------- ----------- LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt........................................... $ 2,904 $ 3,179 $ 3,851 Accounts payable............................................................ 2,685 7,511 5,601 Accrued liabilities......................................................... 2,372 6,312 6,484 Accrued interest............................................................ 407 709 751 --------- --------- ----------- Total current liabilities............................................... 8,368 17,711 16,687 Long-term debt, less current portion.......................................... 35,236 74,288 78,484 Other long term obligations................................................... 100 3,126 2,531 Deferred income taxes......................................................... 1,995 7,247 5,813 --------- --------- ----------- Total liabilities....................................................... 45,699 102,372 103,515 --------- --------- ----------- Commitments and contingencies (Note 9) Redeemable warrants to purchase Class A common stock.......................... 2,600 3,055 3,512 --------- --------- ----------- Common stock and other shareholders' equity: Class A convertible common stock of $.001 par value: Authorized: 2,503,000 shares; Issued and outstanding: none Class B, Series 1, common stock of $.001 par value: Authorized: 17,714,285 shares; Issued and outstanding: 7,869,290 shares in 1993, 8,679,290 shares in 1994 and 8,772,332 shares in 1995............................................. 542 9 9 Class B, Series 2, convertible common stock of $.001 par value: Authorized: 2,571,430 shares; Issued and outstanding: 2,571,430 shares in 1993, 1994 and 1995........... 3,795 2 2 Additional paid-in capital.................................................... 7,351 7,418 Notes receivable from shareholders............................................ (287) (286) (271) Accumulated deficit........................................................... (1,453) (1,683) (1,763) --------- --------- ----------- Total common stock and other shareholders' equity....................... 2,597 5,393 5,395 --------- --------- ----------- Total liabilities, redeemable warrants, common stock and other shareholders' equity................................................... $ 50,896 $ 110,820 $ 112,422 --------- --------- ----------- --------- --------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-3 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED MAY 31, YEAR ENDED AUGUST 31, ------------------------------------------- ---------------------------- 1992 1993 1994 1994 1995 ------------- ------------- ------------- ------------- ------------- (UNAUDITED) Sales...................................... $ 52,152 $ 58,286 $ 70,284 $ 44,624 $ 86,462 Cost of sales.............................. 37,676 42,679 51,670 32,983 65,674 ------------- ------------- ------------- ------------- ------------- Gross profit........................... 14,476 15,607 18,614 11,641 20,788 ------------- ------------- ------------- ------------- ------------- Selling, general and administrative........ 6,046 7,207 8,821 5,526 9,973 Research and development................... 915 820 764 521 943 Amortization of intangibles................ 1,421 1,400 2,025 1,054 2,547 ------------- ------------- ------------- ------------- ------------- 8,382 9,427 11,610 7,101 13,463 ------------- ------------- ------------- ------------- ------------- Income from operations................. 6,094 6,180 7,004 4,540 7,325 ------------- ------------- ------------- ------------- ------------- Other (income) expense: Interest income.......................... (53) (84) (97) (15) (104) Interest expense......................... 3,200 3,128 3,996 2,479 6,235 Amortization of financing costs.......... 365 479 433 309 360 Financing costs.......................... 604 -- 625 -- -- Other (income) expense, net.............. 28 (62) (148) (6) (60) ------------- ------------- ------------- ------------- ------------- 4,144 3,461 4,809 2,767 6,431 ------------- ------------- ------------- ------------- ------------- Income before extraordinary item, cumulative effect of change in accounting principle and income taxes................................. 1,950 2,719 2,195 1,773 894 Income taxes............................... 1,287 1,521 1,095 773 517 ------------- ------------- ------------- ------------- ------------- Income before extraordinary item and cumulative effect of change in accounting principle.................. 663 1,198 1,100 1,000 377 Extraordinary item -- extinguishment of debt, net of income tax benefit of $592 and $539 (Note 7)......................... 889 790 Cumulative effect of change in accounting principle (Note 13)....................... 85 85 ------------- ------------- ------------- ------------- ------------- Net income............................. $ 663 $ 309 $ 225 $ 915 $ 377 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Earnings per share: Income before extraordinary item and cumulative effect of change in accounting principle.................... $0.05 $0.10 $0.08 $0.08 $0.03 Cumulative effect of change in accounting principle............................... $0.01 $0.01 Net income............................... $0.05 $0.02 $0.02 $0.07 $0.03 Number of shares used in computing per share amount.............................. 13,019,028 12,554,053 13,366,327 12,598,173 13,911,667
The accompanying notes are an integral part of these consolidated financial statements. F-4 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS YEAR ENDED AUGUST 31, ENDED MAY 31, ---------------------------------- -------------------- 1992 1993 1994 1994 1995 ---------- ---------- ---------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net income.................................................. $ 663 $ 309 $ 225 $ 915 $ 377 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 5,920 6,845 8,357 5,271 9,089 Extraordinary loss on extinguishment of debt.............. 1,481 1,329 Deferred income taxes..................................... 601 369 (320) (1,005) (1,426) Loss (gain) on property and equipment dispositions........ (13) 8 Provision for losses on accounts receivable............... 5 39 16 33 147 Tax benefit of option exercise.............................. 700 Changes in working capital: Accounts receivable..................................... (1,446) (1,143) (1,526) (1,213) (1,567) Inventories............................................. 269 (685) (908) 217 (2,778) Other current assets.................................... 5 (331) 600 229 774 Accounts payable........................................ 2,042 (1,165) (712) 881 (1,910) Accrued liabilities..................................... (197) 309 1,987 2,127 172 Accrued interest........................................ (150) 32 303 (5) 42 ---------- ---------- ---------- --------- --------- Net cash provided by operating activities............. 7,699 6,768 9,351 7,450 2,920 ---------- ---------- ---------- --------- --------- Cash flows from investing activities: Additions to property, plant and equipment.................. (8,089) (9,564) (6,159) (4,212) (8,247) Proceeds from sale of property, plant and equipment......... 95 49 47 45 287 Payments for Acquisition net of cash acquired of $173.................................................... (30,774) Issuance of notes receivable................................ (412) (75) (173) Repayment of notes receivable............................... 70 13 31 26 (Increase) decrease in other assets......................... (611) 458 (1,563) (1,317) (856) ---------- ---------- ---------- --------- --------- Net cash used in investing activities................. (8,947) (9,119) (38,418) (5,458) (8,989) ---------- ---------- ---------- --------- --------- Cash flows from financing activities: Increase (decrease) in bank overdraft....................... 349 (349) Borrowings under long-term debt arrangements................ 42,110 46,787 54,214 5,953 14,322 Repayments under long-term debt arrangements................ (42,290) (39,771) (24,619) (8,460) (9,454) Payment of loan fees........................................ (2,410) (2,472) Warrants.................................................... 210 Sales of common stock....................................... 110 843 3,025 67 Repayment of notes receivable from shareholders............. 1 1 15 Repurchase of common stock.................................. (1,722) Repayment of covenants...................................... (50) (50) (50) (50) (595) ---------- ---------- ---------- --------- --------- Net cash provided by (used in) financing activities... 229 3,538 30,099 (2,556) 4,355 ---------- ---------- ---------- --------- --------- Increase (decrease) in cash and cash equivalents...... (1,019) 1,187 1,032 (564) (1,714) Cash and cash equivalents at beginning of period.............. 1,019 1,187 1,187 2,219 ---------- ---------- ---------- --------- --------- Cash and cash equivalents at end of period.................... $ -- $ 1,187 $ 2,219 $ 623 $ 505 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-5 PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (INFORMATION FOR THE NINE MONTHS ENDED MAY 31, 1995 IS UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK ---------------------------------------------- CLASS B ---------------------------------------------- SERIES 1 SERIES 2 ADDITIONAL NOTES ---------------------- ---------------------- PAID-IN RECEIVABLE FROM ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT ----------- --------- ----------- --------- ----------- --------------- ------------- Balances, August 31, 1991.......... 7,122 $ 610 2,571 $ 3,795 $ (41) $ (1,618) Issuance of Class B, Series 1 common stock at $1.00 and $2.50 per share....................... 42 98 Exercise of stock options at $.61 per share....................... 19 12 Advance to shareholder........... (250) Increase in value of stock purchase warrants............... (800) Net income....................... 663 ----- --------- ----- --------- ------ ------------- Balances, August 31, 1992.......... 7,183 720 2,571 3,795 (291) (1,755) Issuance of Class B, Series 1 common stock at $1.00 per share........................... 11 11 Exercise of stock options at $0.61 per share................. 1,363 832 Repurchase of Class B, Series 1, common stock at $2.50 per share........................... (688) (1,721) Tax benefit of stock option exercise........................ 700 Payment of note receivable from shareholders.................... 4 Increase in value of stock purchase warrants............... (7) Net income....................... 309 ----- --------- ----- --------- ------ ------------- Balances, August 31, 1993.......... 7,869 542 2,571 3,795 (287) (1,453) Issuance of Class B common stock at $3.75 per share.............. 800 3,000 Exercise of stock options at $2.50 per share................. 10 25 Reincorporation into a Delaware corporation..................... (3,558) (3,793) $ 7,351 Payment of note receivable from shareholders.................... 1 Increase in value of stock purchase warrants............... (455) Net income....................... 225 ----- --------- ----- --------- ----------- ------ ------------- Balances, August 31, 1994.......... 8,679 9 2,571 2 7,351 (286) (1,683) Exercise of stock options at $0.61 and $1.00 per share....... 93 67 Payment of note receivable from shareholders.................... 15 Increase in value of stock purchase warrants............... (457) Net income....................... 377 ----- --------- ----- --------- ----------- ------ ------------- Balances, May 31, 1995............. 8,772 $ 9 2,571 $ 2 $ 7,418 $ (271) $ (1,763) ----- --------- ----- --------- ----------- ------ ------------- ----- --------- ----- --------- ----------- ------ ------------- TOTAL COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY -------------- Balances, August 31, 1991.......... $ 2,746 Issuance of Class B, Series 1 common stock at $1.00 and $2.50 per share....................... 98 Exercise of stock options at $.61 per share....................... 12 Advance to shareholder........... (250) Increase in value of stock purchase warrants............... (800) Net income....................... 663 ------- Balances, August 31, 1992.......... 2,469 Issuance of Class B, Series 1 common stock at $1.00 per share........................... 11 Exercise of stock options at $0.61 per share................. 832 Repurchase of Class B, Series 1, common stock at $2.50 per share........................... (1,721) Tax benefit of stock option exercise........................ 700 Payment of note receivable from shareholders.................... 4 Increase in value of stock purchase warrants............... (7) Net income....................... 309 ------- Balances, August 31, 1993.......... 2,597 Issuance of Class B common stock at $3.75 per share.............. 3,000 Exercise of stock options at $2.50 per share................. 25 Reincorporation into a Delaware corporation..................... -- Payment of note receivable from shareholders.................... 1 Increase in value of stock purchase warrants............... (455) Net income....................... 225 ------- Balances, August 31, 1994.......... 5,393 Exercise of stock options at $0.61 and $1.00 per share....... 67 Payment of note receivable from shareholders.................... 15 Increase in value of stock purchase warrants............... (457) Net income....................... 377 ------- Balances, May 31, 1995............. $ 5,395 ------- -------
The accompanying notes are an integral part of these consolidated financial statements. F-6 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 1. ORGANIZATION: Portola Packaging, Inc. and Subsidiaries, formerly Cap Snap Co., (the "Company") operates in one industry segment. The Company designs, manufactures and markets proprietary tamper evident plastic closures for containers for the food and beverage industries and related capping and filling equipment used on bottling lines by the food and beverage industries. During fiscal year 1994, the Company reincorporated in the state of Delaware. 2. ACQUISITION: Effective June 30, 1994, the Company acquired all of the outstanding stock of Northern Engineering & Plastics Corp. and Northern Engineering and Plastics Corp. -- West (collectively "Nepco"). Concurrent with the acquisition of Nepco, the Company also purchased, from parties related to the owners of Nepco, certain real property located in Sumter, South Carolina. Collectively, these purchases are referred to as the Acquisition. Nepco designs, manufactures and markets tamper evident plastic closures in markets similar to those served by the Company. The real property acquired in Sumter, South Carolina is a location where Nepco maintains substantial operations. The Acquisition has been accounted for as a purchase and the results of operations of Nepco have been consolidated with those of the Company commencing July 1, 1994. The total purchase price, including cash consideration, repayment of existing indebtedness and non-compete agreements, amounted to $43,650. Cash consideration paid by the Company for the Acquisition was $30,947. In addition, the Company assumed, and subsequently paid, Nepco indebtedness of $9,058 and entered into a non-compete agreement under which an intangible asset and a liability totaling $3,645 were recorded at the present value of the payments (using a discount rate of 11%). The Company financed its payments for the Acquisition and Nepco indebtedness which aggregated $40,005, through a series of new term senior and revolving notes as described in Note 7. The cash consideration paid by the Company comprised the following: Cash paid to the former shareholders of Nepco............. $ 28,500 Cash paid for the purchase of real property............... 1,872 Cash paid for certain closing costs....................... 575 --------- $ 30,947 --------- ---------
Cash consideration for the Acquisition was allocated as follows: Total consideration paid.................................. $ 30,947 Fair value of net assets acquired......................... 14,482 --------- Goodwill................................................ $ 16,465 --------- ---------
In connection with the Acquisition, the Company entered into non-compete and bonus agreements with the former owners of Nepco. The non-compete and bonus agreements have a five-year term with annual payments of $800 and $200, respectively. F-7 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 2. ACQUISITION: (CONTINUED) Pro forma financial statements as if the Acquisition had taken place at the beginning of each period presented is as follows:
PRO FORMA PRO FORMA 1993 1994 ----------- ----------- (UNAUDITED) Sales................................................................ $ 89,143 $ 101,415 Gross profit......................................................... 23,230 22,246 Operating income..................................................... 4,517 5,175 Net income (loss).................................................... (2,295) (2,908) Net income (loss) per share.......................................... $ (0.18) $ (0.22)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries, Cap Snap, Inc., Cap Snap Seal, Inc., Cap Snap Co. and Northern Plastics Corporation -- Puerto Rico. All material intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION: The Company recognizes revenue upon product shipment. CASH EQUIVALENTS: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. INVESTMENT: The Company has an investment in a certificate of deposit maturing in September 1995. The investment is carried at cost, which approximates market. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost and depreciated on the straight-line basis over estimated useful lives, which range from three to thirty-five years. Leasehold improvements are amortized on a straight-line basis over their useful lives or the lease term, whichever is shorter (generally five to ten years). When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are included in the results of operations. JOINT VENTURES: The Company maintains joint venture and license arrangements in Canada, the United Kingdom and Mexico. These investments, which are included in other assets, are accounted for by the equity method. The Company's total investment and related income has not been significant and is not separately presented. F-8 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) INTANGIBLE ASSETS: Patents and covenants not-to-compete are valued at cost and are amortized on a straight-line basis over the lesser of their remaining useful or contractual lives (generally five to thirteen years). Goodwill was recorded in connection with the Acquisition (Note 2) and is amortized on a straight-line basis over fifteen years. DEBT FINANCING COSTS: Debt financing costs are amortized using the interest method over the term of the related loans. RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are charged to operations as incurred. INCOME TAXES: Effective September 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of such assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (See Note 13). Prior to September 1, 1993, the Company accounted for income taxes pursuant to Accounting Principles Board Opinion No. 11, Income Taxes. Prior year financial statements have not been restated. CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and trade receivables. The Company's cash and cash equivalents and investments are concentrated in three United States banks at August 31, 1994. At times, such deposits may be in excess of insured limits. Management believes that the financial institutions which hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments. The Company's products are principally sold to entities in the food and beverage industries in the United States. Ongoing credit evaluations of customer financial condition are performed and collateral is generally not required. The Company maintains reserves for potential credit losses which, on a historical basis, have not been significant. EARNINGS PER SHARE: Earnings per common share and common equivalent share are computed by dividing income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The number of common shares is increased by the number of shares issuable on the exercise of options and warrants when the market price of the common stock exceeds the exercise price of the options and warrants. This increase in the number of common shares is reduced by the number of common shares which are assumed to have been purchased with the proceeds from the exercise of the options and warrants; these purchases are assumed to have been made at the average price of the common stock during that part of the period when the market price of the common stock exceeds the exercise price of the options and warrants. F-9 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) CARRYING VALUE OF LONG-LIVED ASSETS: The Company reduces the carrying value of long-lived assets to the extent to which future undiscounted operating cash flows are not sufficient to recover the carrying value of such assets over their remaining estimated useful lives. RECENT ACCOUNTING PRONOUNCEMENTS During March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which requires the Company to review for impairment long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement requires impairment losses to be recognized for assets that do not have realizable carrying values. SFAS 121 will be effective for the Company's fiscal year 1997. The Company has studied the implications of the statement, and, based on its initial evaluation, does not expect it to have a material impact on the Company's financial condition or results of operations, at this time. RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform with the current year financial statement presentation. These reclassifications had no effect on net income. INTERIM RESULTS (UNAUDITED) The accompanying Consolidated Balance Sheet at May 31, 1995, the Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the nine months ended May 31, 1994 and 1995, and the Consolidated Statement of Shareholders' Equity for the nine months ended May 31, 1995 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods. The data disclosed in these notes to the consolidated financial statements for these periods are unaudited. 4. SUPPLEMENTAL CASH FLOW DISCLOSURES: The Company paid $725, $74 and $835 in income taxes during the years ended August 31, 1992, 1993 and 1994, respectively. The Company paid $3,183, $3,257 and $3,693 in interest during the years ended August 31, 1992, 1993 and 1994, respectively. During fiscal year 1993, the Company received 688 shares of its Class B common stock from an officer and director in settlement of stock options exercised and related federal and state withholding tax obligations. During fiscal year 1994, the Company reincorporated into a Delaware corporation, which resulted in a reclassification of $7,351 Class B common stock into additional paid-in capital. During fiscal year 1994, the Company acquired $8 of equipment under capital lease. During fiscal year 1994, the Company adopted SFAS No. 109 under which fixed assets and patents were grossed up $1,322 and $1,906, respectively, consistent with the gross-up of the deferred tax liability. F-10 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 4. SUPPLEMENTAL CASH FLOW DISCLOSURES: (CONTINUED) During fiscal 1994, the Company wrote off fully depreciated property, plant and equipment totaling $3,233. 5. INVENTORIES:
AUGUST 31, -------------------- 1993 1994 --------- --------- MAY 31, 1995 ----------- (UNAUDITED) Raw materials.............................................. $ 2,404 $ 3,695 $ 5,027 Work in process............................................ 471 1,667 2,962 Finished goods............................................. 1,965 3,079 3,230 --------- --------- ----------- $ 4,840 $ 8,441 $ 11,219 --------- --------- ----------- --------- --------- -----------
6. PROPERTY, PLANT AND EQUIPMENT:
AUGUST 31, ---------------------- 1993 1994 ---------- ---------- MAY 31, 1995 ----------- (UNAUDITED) Building and land...................................... $ 2,947 $ 11,989 $ 11,634 Machinery and equipment................................ 37,617 53,831 61,729 Leasehold improvements................................. 2,010 2,472 2,904 ---------- ---------- ----------- 42,574 68,292 76,267 Less accumulated depreciation and amortization....... (18,581) (21,145) (27,364) ---------- ---------- ----------- $ 23,993 $ 47,147 $ 48,903 ---------- ---------- ----------- ---------- ---------- -----------
Depreciation charged to operations was $3,901, $4,946 and $5,903 for the years ended August 31, 1992, 1993 and 1994, respectively. 7. DEBT: CURRENT PORTION OF LONG-TERM DEBT:
AUGUST 31, -------------------- 1993 1994 --------- --------- MAY 31, 1995 ----------- (UNAUDITED) Term Loan Note A........................................... $ 3,000 $ 3,750 Term Loan Note............................................. $ 2,750 Deed of Trust Note......................................... 13 Equipment Note............................................. 85 85 Development Note........................................... 15 16 Capital Lease Obligations.................................. 64 Unsecured Notes............................................ 141 15 --------- --------- ----------- $ 2,904 $ 3,179 $ 3,851 --------- --------- ----------- --------- --------- -----------
F-11 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 7. DEBT: (CONTINUED) LONG-TERM DEBT:
AUGUST 31, -------------------- 1993 1994 --------- --------- MAY 31, 1995 ----------- (UNAUDITED) Term Loan Note A......................................... $ 27,000 $ 24,000 Term Loan Note B......................................... 30,000 30,000 Term Loan Note........................................... $ 14,094 Senior Subordinated Notes................................ 10,000 10,000 10,000 Revolving Loan Note...................................... 4,778 7,116 14,388 Capex Loan Note.......................................... 6,245 Deed of Trust Note....................................... 104 Equipment Note........................................... 63 Development Note......................................... 109 96 Unsecured Notes.......................................... 15 --------- --------- ----------- $ 35,236 $ 74,288 $ 78,484 --------- --------- ----------- --------- --------- -----------
TERM LOAN NOTES: The Term Loan Note outstanding at August 31, 1993 was repaid from proceeds of a new term note (Term Loan Note A) of $30,000 issued in June 1994. Principal payments for Term Loan Note A are due quarterly in the amount of $750 through July 1, 1995, then increasing every fifth quarter to $1,000, $1,500, $2,000 and $2,250 with the final payment on July 1, 1999. Interest is payable monthly based on London Interbank Offered Rate (LIBOR) or the highest prime rate of selected reference banks, plus an applicable margin. At August 31 1994, the interest rate was 7.75% (LIBOR, plus 3.25%). The Term Loan Note B of $30,000 was issued in June 1994. Principal payments are due quarterly beginning on October 1, 1999 and ending on July 1, 2001 in the amount of $3,750. Interest is payable monthly based on LIBOR or the highest prime rate of selected reference banks, plus an applicable margin. At August 31, 1994, the interest rate was 8.25% (LIBOR, plus 3.75%). The Term Loan Notes are subject to a Credit and Security Agreement in which the Company has granted a security interest in all of its assets. The Agreement requires the Company to maintain certain specified coverage levels on interest expense and total debt service requirements. It also prohibits cash dividends and principal payments on subordinated debt, and limits new indebtedness and investments. The Agreement calls for mandatory prepayments after December 1995 based upon financial calculations including excess cash flow. SENIOR SUBORDINATED NOTES: The previous Senior Subordinated Notes were extinguished and replaced as of June 30, 1994 by new Senior Subordinated Notes. This transaction was recorded as an early extinguishment of debt as discussed under Extraordinary Items below. The interest rate is 13.5% payable quarterly, and the full principal amount is due on June 30, 2002. The Senior Subordinated Notes may be prepaid in part or in full at any time, plus a premium based on yield differentials if the prepayment is prior to June 30, 1996. On June 30, 1996, the lenders have the option to convert the loan to a floating rate, at either LIBOR or prime, plus an applicable margin. F-12 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 7. DEBT: (CONTINUED) REVOLVING LOAN NOTE: The revolving credit facility is maintained to finance working capital requirements, and expires on July 1, 2001. The facility provides for borrowings based on eligible accounts receivable and inventories up to the commitment amount of $18,000. No amounts are due to be repaid until July 1, 2001, subject to collateral requirements; however the Company may prepay any portion thereof without penalty. Interest is payable monthly based on the highest prime rate of selected reference banks, plus an applicable margin. At August 31, 1994 the interest rate was 7.75% (LIBOR rate plus 3.25%) for approximately $5.0 million and 9.5% (prime rate plus 1.75%) for approximately $2.1 million. The Revolving Loan Note is subject to the same Credit and Security Agreement as the Term Loan Notes discussed above. CAPEX LOAN NOTE: In October 1992, the Company obtained a capital expenditure facility (the Capex Loan Note). The Company may draw on this facility to fund 80% of eligible capital expenditures up until its repayment, in aggregate not to exceed $10,000. Through August 31, 1993, the Company had drawn $6,245 against the facility. The Capex Loan Note is subject to the same Credit and Security Agreement as the prior Term Loan Note. Interest expense options are the same as the prior Term Loan Note, and the interest rate was 6.7% (LIBOR, plus 3.5%) at August 31, 1993. In June 1994, the Company repaid the Capex Loan Note in connection with the Company's debt refinancing as discussed under Extraordinary Items below. DEED OF TRUST NOTE: The Deed of Trust Note is payable in annual installments of $13 plus accrued interest of 9% on the unpaid principal balance. The note was repaid during fiscal 1994. EQUIPMENT NOTE: The Equipment Note was obtained to acquire machinery and equipment for the Company's Sumter, South Carolina facility. Interest is payable monthly based on a variable rate established as 67% of the prime lending rate (7.25% at August 31,1994). Principal is payable monthly in the amount of $7 with the final installment due on June 1, 1996. The Equipment Note is collateralized by the machinery and equipment that was purchased with the proceeds. DEVELOPMENT NOTE: The Company has a Development Note with the Bi-State Regional Commission. The Development Note bears interest at 4% with the final monthly payment due in May 2001. F-13 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 7. DEBT: (CONTINUED) CAPITAL LEASE OBLIGATIONS: The Company has a plant located in New Castle, Pennsylvania under a lease agreement with the local Industrial Development Authority. Lease payments are payable monthly in the amount of $5 through September 1994. In addition, the Company acquired certain equipment under noncancelable capital leases. The balance sheet includes the following items held under capital lease obligations.
AUGUST 31, 1994 ------------- Building..................................................... $ 438 Land......................................................... 65 Equipment.................................................... 64 ----- 567 Less accumulated amortization.............................. (6) ----- $ 561 ----- -----
UNSECURED NOTES: The Unsecured Notes, with interest at 12%, are due in varying quarterly installments through December 1994. EXTRAORDINARY ITEMS: In connection with the Company's early extinguishment of debt in June 1994, certain costs, consisting primarily of loan fees of approximately $1,329, were expensed. These transactions have been reported as an extraordinary item in the statement of operations, net of an income tax benefit of approximately $539. In connection with the Company's October 1992 refinancing activities, certain costs, consisting of advisory fees of approximately $373, were incurred by the Company related to the early extinguishment of debt. In addition to these amounts, loan fees related to the extinguished debt of approximately $694, and the unamortized portion of the warrant discount attributed to the original $10,000 Senior Subordinated Notes of approximately $414 were expensed in connection with this early extinguishment of debt. These transactions have been reported as an extraordinary item in the statement of operations, net of an income tax benefit of approximately $592. FINANCING COSTS: In connection with debt offerings which were commenced but not completed, the Company expensed costs amounting to $604 and $625 in fiscal 1992 and 1994, respectively. F-14 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 7. DEBT: (CONTINUED) AGGREGATE MATURITIES OF LONG-TERM DEBT: The aggregate maturities of long-term debt as of August 31, 1994 are as follows:
UNSECURED TERM LOAN NOTES AND NOTES AND SENIOR EQUIPMENT NOTE CAPITAL FISCAL YEARS REVOLVING SUBORDINATED AND DEVELOPMENT LEASE ENDED AUGUST 31, LOANS NOTES NOTE OBLIGATIONS TOTAL - ---------------------------------- ----------- ------------- --------------- ----------- --------- 1995.............................. $ 3,000 $ 100 $ 79 $ 3,179 1996.............................. 4,000 78 4,078 1997.............................. 6,000 15 6,015 1998.............................. 8,000 15 8,015 1999.............................. 9,000 15 9,015 Thereafter........................ 37,116 $ 10,000 49 47,165 ----------- ------------- ----- ----------- --------- $ 67,116 $ 10,000 $ 272 $ 79 $ 77,467 ----------- ------------- ----- ----------- --------- ----------- ------------- ----- ----------- ---------
8. OTHER LONG-TERM OBLIGATIONS: The Company has incurred certain liabilities in connection with agreements entered into with former owners, which include provisions for guaranteed bonuses and covenants not-to-compete, as follows:
AUGUST 31, -------------------- MAY 31, 1993 1994 1995 --------- --------- --------- Covenants under Nepco acquisition................................ $ 3,694 $ 3,231 Other covenants.................................................. $ 150 100 50 --------- --------- --------- Total obligations.............................................. 150 3,794 3,281 Current portion.................................................. 50 668 750 --------- --------- --------- $ 100 $ 3,126 $ 2,531 --------- --------- --------- --------- --------- ---------
9. COMMITMENTS AND CONTINGENCIES: The Company leases certain office, production and warehouse facilities under operating lease agreements expiring on various dates through 2007. Under the terms of the facilities' leases, the Company is responsible for common area maintenance expenses which include taxes, insurance, repairs and other operating costs. At August 31, 1994 future minimum rental commitments under agreements with terms in excess of twelve months were as follows:
FISCAL YEARS LEASED FROM THREE ENDED AUGUST 31, SISTERS RANCH OTHER LEASES TOTAL - ---------------------------------------------- -------------------- ------------- --------- 1995.......................................... $ 670 $ 930 $ 1,600 1996.......................................... 250 957 1,207 1997.......................................... 849 849 1998.......................................... 470 470 1999.......................................... 450 450 Thereafter.................................... 3,601 3,601 ------- ------------- --------- $ 920 $ 7,257 $ 8,177 ------- ------------- --------- ------- ------------- ---------
F-15 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 9. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Base rent expense for the years ended August 31, 1992, 1993 and 1994 totaled $880, $886 and $1,395, respectively, of which $716, $619 and $696 was paid to Three Sisters for the years ended August 31, 1992, 1993 and 1994, respectively. The Company is engaged in litigation related to alleged patent infringement on five-gallon non-spill caps. On February 1995, a jury rendered an adverse verdict against the Company which would hold the Company liable for damages of $0.01 per cap. The jury verdict, which has not yet been entered by the court, would render the Company liable for approximately $800; however, the Company intends to appeal the verdict if so entered. The financial statements as of August 31, 1994 include an accrual of approximately $480, which approximates the aforementioned $0.01 damages per cap on five-gallon non-spill caps sold through August 31, 1994. An additional $320 was reserved during the nine month period ended May 31, 1995 (unaudited). Non-spill caps produced after May 1995 may be subject to treble damages of $0.03 per cap. Management believes that a material adverse result is not probable. The Company is also a party to a number of other lawsuits and claims arising out of the normal course of business. Management does not believe the final disposition of these matters will have a material adverse affect on the financial position, results of operations or cash flows of the Company. The financial statements include costs related to the litigation, including accruals for damages and attorney costs, of $77, $410 and $603 for the years ended August 1992, 1993 and 1994, respectively, and $475 and $1,166 for the nine months ended May 31, 1994 and 1995 (unaudited), respectively. 10. REDEEMABLE WARRANTS: The Company has outstanding two warrants to purchase an aggregate of 2,493 shares of its Class A common stock which are held by the Company's subordinated and senior lenders. A warrant to purchase 2,053 shares of common stock is exercisable, in whole or in part, through June 30, 2004 at sixty and two-third cents per share, subject to certain antidilution provisions. After June 30, 1999, if the Company has not completed an initial public offering of its common stock, the lender may require the Company to purchase the warrant at a price equal to the higher of the current fair value per share of the Company's common stock or an amount computed under an earnings formula in the warrant agreement. The purchase obligation may be suspended under certain circumstances including restrictions on such payments as specified in the senior and subordinated credit agreements. After December 31, 2001, the Company has the right to repurchase the warrant at a price equal to the higher of the fair value per share of the Company's common stock or an amount computed under an earnings formula in the warrant agreement. The earnings formula is based on income before interest, taxes and debt outstanding to calculate an estimated value per share. At August 31, 1993 and 1994 and May 31, 1995 the accretion was determined using the fair market value of the common stock. A second warrant to purchase 440 shares of Class A common stock may be exercised at any time until its expiration on June 30, 2004. After August 1, 2001, if the Company has not completed an initial public offering of its common stock, the senior lender may require the Company to purchase its warrant at a price equal to the higher of the current fair value price per share of the Company's common stock or the net book value per share as computed under a valuation formula set forth in the warrant. The purchase obligation may be suspended under certain circumstances including restriction on such payments as specified in the senior and subordinated credit agreements. After December 31, 1997, the Company has the right to repurchase the warrant at a price equal to the higher of the current fair value per share of the Company's common stock or the net book value per share. The earnings formula is F-16 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 10. REDEEMABLE WARRANTS: (CONTINUED) based on earnings before interest and taxes and debt outstanding to calculate a estimated value per share. At August 31, 1993 and 1994 and May 31, 1995, the put value was determined using the current fair value of the common stock. The earnings formula is based on income before interest, taxes and debt outstanding to calculate an estimated value per share. At August 31, 1993 and 1994 and May 31, 1995 the accretion was determined using the fair value of the common stock. Both warrants were amended and restated in connection with the Company's June 1994 refinancing activities, which resulted in no change to their carrying value. Generally accepted accounting principles require that an adjustment of the warrant from the value assigned at the date of issuance to the highest redemption price of the warrant be accreted over the period of the warrant. At August 31, 1994, the estimated redemption value of the warrants exceeds their carrying value. The difference is being charged to accumulated deficit over the period from the date of issuance to the earliest put date of the warrants. Charges to accumulated deficit related to the warrants amounted to $800, $7 and $455 during the years ended August 31, 1992, 1993 and 1994, respectively. 11. SHAREHOLDERS' EQUITY: REINCORPORATION: In June 1994, the Company was reincorporated from California to Delaware, at which time the Company's outstanding common stock was exchanged on a one share of the California corporation common stock for one share of the Delaware corporation common stock. CLASS A AND B COMMON STOCK: The Company's Class B common stock, consists of 20,286 authorized shares, and is divided into two series: Series 1, consisting of 17,715 authorized shares, and Series 2, consisting of 2,571 authorized shares. As of August 31, 1994, there were 8,679 shares of Class B, Series 1 common shares issued and outstanding, and 2,571 shares of Class B, Series 2 common shares issued and outstanding. The Company has authorized 2,503 shares of Class A common stock for the warrants described in Note 10. Class A common shareholders are not entitled to elect members of the Board of Directors. In the event of an aggregate public offering exceeding $10,000, the Class A and Class B, Series 2 common stock is automatically converted into Class B, Series 1 common stock, based on the appropriate conversion formula. The Class B common shareholders have the right to elect members of the Board of Directors, with the holders of Series 1 having one vote per share, and the holders of Series 2 having a number of votes equal to the number of shares into which the Series 2 shares are convertible into Series 1 shares. In the event of liquidation or dissolution in which the value of the Company is less than $1.75 per share of common stock, the holders of Class B, Series 2 will receive 60% of the proceeds until they have received $1.75 per share. All other amounts available for distribution shall be distributed to the Class B, Series 1 and Series 2 holders pro rata based on the number of shares outstanding. If the value of the Company is greater than or equal to $1.75 per share, the holders of all classes of common stock are entitled to a pro rata distribution based on the number of shares outstanding. The Company is required to reserve shares of Class B, Series 1 stock for the conversion of Class A and Class B, Series 2 into Class B, Series 1 common stock. F-17 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 11. SHAREHOLDERS' EQUITY: (CONTINUED) DIRECTORS' AGREEMENTS: The Company entered into Directors' Agreements dated September 1989 and amended in January 1990, with certain directors who are also shareholders of the Company. The agreements provided that the Company is to pay up to $22 per year to each individual for serving as a director, and granted each director the right to purchase up to 22 shares per year of Class B, Series 1 common stock at $1.00 per share. In October 1990, the Company entered into a Director's Agreement with another director, who is also a shareholder of the Company. The agreement provided that the Company pay up to $22 per year for services as a director. During the years ended August 31, 1993 and 1994, respectively, the Company paid $81 and $82 in director fees and related expenses, and issued 11 and 42 shares of Class B, Series 1 common stock pursuant to the stock purchase agreements. STOCK OPTION PLAN: The Company has reserved 2,866 and 1,000 shares of Class B, Series 1 common stock for issuance under the Company's 1988 and 1994 nonqualified stock option plans, respectively. Under both plans, stock options are granted by the Board of Directors at prices not less than 85% of fair market value of the Company's stock at the date of grant.
OUTSTANDING -------------------- AVAILABLE STOCK OPTIONS SHARES AMOUNT EXERCISABLE FOR GRANT - ---------------------------------------- OPTION PRICE PER --------- --------- ------------- ----------- SHARE ---------------- (NOT THOUSANDS) August 31, 1991......................... $0.61-$1.75 2,404 $ 1,806 1,983 330 Granted............................... $1.75-$2.50 70 175 (70) Became exercisable.................... 204 Exercised............................. $0.61 (19) (12) (19) Canceled.............................. $0.61 (40) (24) (20) 40 --------- --------- ------ ----- August 31, 1992......................... $0.61-$2.50 2,415 1,945 2,148 300 Granted............................... $2.50 160 400 (160) Became exercisable.................... 131 Exercised............................. $0.61 (1,363) (832) (1,363) --------- --------- ------ ----- August 31, 1993......................... $0.61-$2.50 1,212 1,513 916 140 Granted............................... $2.50 70 175 (70) Became exercisable.................... 123 Exercised............................. $2.50 (10) (25) (10) Canceled.............................. $1.75 (25) (44) (16) 25 --------- --------- ------ ----- August 31, 1994......................... $.061-$2.50 1,247 1,619 1,013 95 Reservation of shares................. 1,000 Granted............................... $3.75-$4.00 230 898 (230) Became exercisable.................... 64 Exercised............................. $0.61-$1.00 (93) (69) (93) --------- --------- ------ ----- May 31, 1995............................ $0.61-$4.00 1,384 $ 2,448 984 865 --------- --------- ------ ----- --------- --------- ------ -----
F-18 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information as of May 31, 1995 and for the nine months ended May 31, 1995 and 1994 is unaudited) (in thousands) 12. EMPLOYEE BENEFIT PLANS: PROFIT SHARING PLAN: The Company has a Profit Sharing Plan that covers substantially all employees. Contributions are at the discretion of the Board of Directors and amounted to $228, $245 and $221 for the years ended August 31, 1992, 1993 and 1994, respectively. RETIREMENT AND SAVINGS PLAN: The Company also maintains a Retirement and Savings Plan which is a defined contribution plan covering all full-time employees of the Company who are age twenty-one or older, have completed one year of service and are not covered by a collective bargaining agreement. Expense in connection with the Retirement and Savings Plan amounted to $11 for the year ended August 31, 1992 and $6 for the years ended August 31, 1994 and 1993. 13. INCOME TAXES: The provision for income taxes for the three years ended August 31, 1994 consists of the following:
YEAR ENDED AUGUST 31, ------------------------------- 1992 1993 1994 --------- --------- --------- Current: Federal............................................ $ 501 $ 721 $ 1,013 State.............................................. 185 260 344 --------- --------- --------- 686 981 1,357 Deferred: Federal............................................ 452 456 (176) State.............................................. 149 84 (86) --------- --------- --------- 601 540 (262) --------- --------- --------- $ 1,287 $ 1,521 $ 1,095 --------- --------- --------- --------- --------- ---------
As discussed in Note 3, Summary of Significant Accounting Policies, the Company adopted SFAS No. 109 effective September 1, 1993. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109; however, prior year business combinations have been restated as of September 1, 1993 under SFAS No. 109. A reconciliation setting forth the differences between the effective tax rate of the Company and the U.S. federal statutory tax rate is as follows:
YEAR ENDED AUGUST 31, ------------------------------------- 1992 1993 1994 ----------- ----------- ----------- Federal statutory rate................................. 34.0% 34.0% 34.0% State taxes............................................ 9.6 8.4 6.6 Nondeductible amortization and depreciation............ 20.6 13.3 7.4 Other.................................................. 1.8 0.2 1.9 --- --- --- Effective income tax rate............................ 66.0% 55.9% 49.9% --- --- --- --- --- ---
F-19 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 13. INCOME TAXES: (CONTINUED) The components of the net deferred tax liabilities as of August 31, 1994: Deferred tax assets: Federal credits.......................................... $ 651 State tax credits........................................ 360 Accounts receivable...................................... 158 Other liabilities........................................ 580 --------- Total assets........................................... 1,749 --------- Deferred tax liabilities: Property, plant and equipment............................ 7,227 Intangible assets........................................ 1,031 --------- Total liabilities...................................... 8,258 --------- Net deferred tax liabilities........................... $ 6,509 --------- ---------
14. EXPORT SALES: Export sales to unaffiliated customers were $5,240, $6,674 and $8,071 for the years ended August 31, 1992, 1993 and 1994, respectively. Export sales are predominantly to North America, the Middle East and the Pacific Rim. During fiscal 1994, export sales to North America, the Middle East and the Pacific Rim accounted for 44%, 18% and 8% of total export sales, respectively. 15. RELATED PARTY TRANSACTIONS: The Company paid $63, $183 and $162 for the years ended August 31, 1992, 1993 and 1994, respectively, to a company for prototype mold development and mold engineering work. A director of the aforementioned company is also an officer and director of the Company. The Company paid $267 and $451 and $420 for the years ended August 31, 1992, 1993 and 1994, respectively, to a law firm for legal services rendered. A general partner of the aforementioned firm is also a director of the Company. The Company paid $42 for the years ended August 31, 1992, 1993 and 1994 to a corporation for management fees. A shareholder of the aforementioned corporation is also a director and significant shareholder of the Company. The Company paid $350 and $211 for the years ended August 31, 1992 and 1993, respectively, to a partnership for investment banking finder fees and expenses, a partner of which is a director of the Company. The Company had debt outstanding with a financial institution of $10,000 at August 31, 1993 and 1994 on which the Company paid interest of approximately $1,350 for the last two fiscal years. The Company also paid $401, $220 and $258 for the years ended August 31, 1992, 1993 and 1994, respectively, to the same financial institution for ongoing corporate advice and in connection with the refinancing in fiscal years 1993 and 1994. The Company has amounts receivable from non-consolidated affiliated companies which amounted to $28, $156 and $421 as of August 31, 1992, 1993 and 1994, respectively. F-20 PORTOLA PACKAGING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MAY 31, 1995 AND FOR THE NINE MONTHS ENDED MAY 31, 1995 AND 1994 IS UNAUDITED) (IN THOUSANDS) 15. RELATED PARTY TRANSACTIONS: (CONTINUED) The Company leases certain office, production and warehouse facilities from Three Sisters Ranch Enterprises (Three Sisters). Certain general partners in Three Sisters are also minority shareholders in the Company. The Company owed $488, $156 and $15 at August 31, 1992, 1993 and 1994, respectively, in the form of unsecured notes due to Three Sisters. 16. SUBSEQUENT EVENTS (UNAUDITED): Effective June 15, 1995, the Company completed the acquisition of Alberta Plastic Industries Ltd., B.C. Plastic Industries Ltd., the remaining 50% interest of the Company's joint venture, Canada Cap Snap Corporation, and certain production equipment of Allwest Industries Incorporation. This acquisition is to be recorded as a purchase. The total purchase price amounted to approximately $14.6 million Canadian dollars (approximately $10.6 million United States dollars). In addition, the Company entered into a separate non-compete with a former shareholder of the acquired entities in the amount of $4.0 million Canadian (approximately $2.9 million United States dollars). In June 1995, the Company sold 450 shares (200 of the shares were sold to a related party) of its common stock for a total of $1,800. In September 1995, the Company completed the acquisition of Cap Snap (U.K.) Ltd. (the remaining 50% of the Company's joint venture). This acquisition is to be recorded as a purchase. The total purchase price amounted to 900 pounds sterling (approximately $1.4 million U.S. dollars). F-21 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Northern Engineering and Plastics Corporation: We have audited the accompanying combined balance sheet of the Northern Engineering and Plastics Corporation as of August 31, 1993, and the related combined statements of operations, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The combined financial statements of the Northern Engineering and Plastics Corporation as of August 31, 1992 and for the years ended August 31, 1992 and 1991 were audited by other auditors, whose report dated November 20, 1992, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Northern Engineering and Plastics Corporation at August 31, 1993, and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 10 to the combined financial statements, in 1993 the Company changed its method of accounting for income taxes. COOPERS & LYBRAND L.L.P. Pittsburgh, Pennsylvania June 1, 1994, except as to the information presented in Note 11, for which the date is June 30, 1994 F-22 INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors Northern Engineering and Plastics Corp. New Castle, Pennsylvania We have audited the accompanying consolidated balance sheets of Northern Engineering and Plastics Corp. and subsidiary as of August 31, 1992 and 1991, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northern Engineering and Plastics Corp. and subsidiary as of August 31, 1992 and 1991, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Carbis Walker & Associates LLP Certified Public Accountants New Castle, Pennsylvania November 20, 1992 F-23 NORTHERN ENGINEERING AND PLASTICS CORPORATION COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31, -------------------- 1992 1993 --------- --------- JUNE 30, 1994 ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................................... $ 812 $ 918 $ 173 Accounts and notes receivable, net of allowance for doubtful accounts of $34 in 1992, $43 in 1993 and $54 in 1994....................................... 3,442 4,826 5,360 Due from related parties.................................................... 179 296 240 Inventories................................................................. 2,352 1,987 2,450 Prepaid income taxes........................................................ 150 227 24 Deferred income taxes....................................................... -- 44 86 Deposits on equipment....................................................... 228 354 1,153 Other current assets........................................................ 210 74 273 --------- --------- ----------- Total current assets.................................................... 7,373 8,726 9,759 Certificate of deposit........................................................ 1,000 1,000 1,000 Notes receivable, less current portion........................................ 70 70 70 Notes receivable from related parties......................................... 142 142 142 Patents, net of accumulated amortization of $118 in 1992, $122 in 1993 and $127 in 1994................................................................. 50 63 88 Property and equipment, net................................................... 10,621 13,011 16,956 --------- --------- ----------- Total assets............................................................ $ 19,256 $ 23,012 $ 28,015 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Revolving line of credit.................................................... $ -- $ 1,500 $ 1,500 Current portion of long-term debt and note payable.......................... 503 532 507 Accounts payable............................................................ 1,781 4,199 5,538 Payable to related parties.................................................. 346 329 302 Accrued expenses............................................................ 369 235 288 --------- --------- ----------- Total current liabilities............................................... 2,999 6,795 8,135 Long-term debt, less current portion.......................................... 3,157 2,947 7,616 Notes payable to related party................................................ 202 173 -- Deferred income taxes......................................................... 1,028 885 566 --------- --------- ----------- Total liabilities....................................................... 7,386 10,800 16,317 Commitments and contingencies (Note 8) Shareholders' equity: Northern Engineering and Plastics Corporation, Inc. 7% non-cumulative preferred stock, $40 par value. Authorized: 100,000 shares; issued and outstanding: 1,045 shares.................................................. 42 42 42 Northern Engineering and Plastics Corporation, Inc. common stock, $1 par value, authorized: 100,000 shares, issued and outstanding: 27,610 shares... 28 28 28 NEPCO-West common stock, $10 par value authorized: 100,000 shares; issued and outstanding: 1,000 shares.............................................. 10 10 10 Additional paid-in capital.................................................. 2,161 2,161 2,161 Retained earnings........................................................... 9,629 9,971 9,457 --------- --------- ----------- Total shareholders' equity.............................................. 11,870 12,212 11,698 --------- --------- ----------- Total liabilities and shareholders' equity............................ $ 19,256 $ 23,012 $ 28,015 --------- --------- ----------- --------- --------- -----------
The accompanying notes are an integral part of these combined financial statements. F-24 NORTHERN ENGINEERING AND PLASTICS CORPORATION COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
YEAR ENDED AUGUST 31, ------------------------------- 1991 1992 1993 --------- --------- --------- TEN MONTHS ENDED JUNE 30, --------------- 1994 --------------- (UNAUDITED) Sales........................................................ $ 27,026 $ 25,308 $ 30,857 $ 31,131 Cost of sales................................................ 21,216 19,514 22,922 27,313 --------- --------- --------- --------------- Gross profit............................................. 5,810 5,794 7,935 3,818 --------- --------- --------- --------------- Selling and warehousing...................................... 2,264 2,739 4,819 2,446 Administrative............................................... 2,409 2,689 2,969 1,835 Research and development..................................... 64 86 282 142 Amortization of patents...................................... 2 4 5 5 --------- --------- --------- --------------- 4,739 5,518 8,075 4,428 --------- --------- --------- --------------- Income (loss) from operations............................ 1,071 276 (140) (610) --------- --------- --------- --------------- Other income (expense): Interest income............................................ 237 206 134 50 Interest expense........................................... (346) (308) (320) (430) Other, net................................................. 585 455 702 236 --------- --------- --------- --------------- 476 353 516 (144) --------- --------- --------- --------------- Income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle..... 1,547 629 376 (754) --------- --------- --------- --------------- Income taxes (benefit)....................................... 606 289 138 (240) --------- --------- --------- --------------- Income (loss) before extraordinary item and the cumulative effect of change in accounting principle..... 941 340 238 (514) --------- --------- --------- --------------- Extraordinary item, reduction of income taxes arising from carryforward of prior year's net operating loss............. 28 -- -- -- Cumulative effect of change in accounting principle.......... -- -- 104 -- --------- --------- --------- --------------- Net income (loss)........................................ $ 969 $ 340 $ 342 $ (514) --------- --------- --------- --------------- --------- --------- --------- --------------- Income (loss) per common share: Before extraordinary item and cumulative effect of change in accounting principle................................... $ 32.89 $ 11.88 $ 8.32 $ (17.97) Extraordinary item......................................... 0.98 -- -- -- Cumulative effect of change in accounting principle........ -- -- 3.63 -- --------- --------- --------- --------------- Net income (loss) per common share....................... $ 33.87 $ 11.88 $ 11.95 $ (17.97) --------- --------- --------- --------------- --------- --------- --------- --------------- Number of shares used in computing per share amount.......... 28,610 28,610 28,610 28,610 --------- --------- --------- --------------- --------- --------- --------- ---------------
The accompanying notes are an integral part of these combined financial statements. F-25 NORTHERN ENGINEERING AND PLASTICS CORPORATION COMBINED STATEMENTS OF RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
TEN MONTHS YEAR ENDED AUGUST 31, ENDED JUNE 30, ------------------------------- --------------- 1991 1992 1993 1994 --------- --------- --------- --------------- Balance, beginning............................................... $ 8,423 $ 9,292 $ 9,629 $ 9,971 Net income (loss)................................................ 969 340 342 (514) Dividend on common stock, $3.62 per share........................ (100) -- -- -- 7% preferred stock dividend...................................... -- (3) -- -- --------- --------- --------- ------- Balance, ending.................................................. $ 9,292 $ 9,629 $ 9,971 $ 9,457 --------- --------- --------- ------- --------- --------- --------- -------
The accompanying notes are an integral part of these combined financial statements. F-26 NORTHERN ENGINEERING AND PLASTICS CORPORATION COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED AUGUST 31 ------------------------------- 1991 1992 1993 --------- --------- --------- TEN MONTHS ENDED JUNE 30, 1994 --------------- (UNAUDITED) Cash flows from operating activities: Net income (loss)........................................... $ 969 $ 340 $ 342 $ (514) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 985 1,129 1,290 1,449 Cumulative effect of change in accounting principle....... -- -- (104) -- Provision for losses on accounts receivable............... 160 50 150 11 Gain on sale of equipment and securities.................. (38) (196) (88) 1 Deferred income taxes..................................... 45 85 (35) (361) Changes in assets and liabilities: Accounts and notes receivable........................... 143 268 (1,534) (545) Due from related parties................................ 43 (105) (117) 56 Inventories............................................. (52) (638) 365 (463) Accounts payable........................................ 111 (23) 2,418 1,339 Payable to related parties.............................. (108) 203 (46) (27) Accrued expenses........................................ 335 (440) (134) 53 Other................................................... 38 (253) (126) (795) --------- --------- --------- ------- Net cash provided by operating activities..................... 2,631 420 2,381 204 --------- --------- --------- ------- Cash flows from investing activities: Additions to property and equipment......................... (1,608) (2,457) (3,678) (5,391) Proceeds from sale of equipment and securities.............. 152 315 102 1 Purchase of patents......................................... (18) (7) (18) (30) Other....................................................... 4 2 -- --------- --------- --------- ------- Net cash used in investing activities......................... (1,470) (2,147) (3,594) (5,420) --------- --------- --------- ------- Cash flows from financing activities: Net borrowings from line of credit.......................... -- -- 1,500 -- Proceeds from long-term borrowings.......................... -- 579 221 4,669 Payments on long-term borrowings............................ (419) (424) (402) (198) Cash dividend on common stock............................... (100) -- -- -- Cash dividend on preferred stock............................ -- (3) -- -- --------- --------- --------- ------- Net cash provided by (used in) financing activities........... (519) 152 1,319 4,471 --------- --------- --------- ------- Increase (decrease) in cash and cash equivalents.............. 642 (1,575) 106 (745) Cash and cash equivalents, beginning of period................ 1,745 2,387 812 918 --------- --------- --------- ------- Cash and cash equivalents, end of period...................... $ 2,387 $ 812 $ 918 173 --------- --------- --------- ------- --------- --------- --------- ------- Supplemental disclosures: Income taxes paid........................................... $ 198 $ 644 $ 289 $ 52 --------- --------- --------- ------- --------- --------- --------- ------- Interest paid............................................... $ 347 $ 312 $ 311 $ 380 --------- --------- --------- ------- --------- --------- --------- -------
The accompanying notes are an integral part of these combined financial statements. F-27 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS: Northern Engineering and Plastics Corporation (NEPCO) and Northern Engineering and Plastics Corporation -- West (NEPCO-West) design, manufacture and market tamper-evident plastic closures principally for the dairy and juice industries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF COMBINATION: The accompanying combined financial statements include the accounts of NEPCO and its subsidiaries and NEPCO-West, all of which are under common management (hereinafter the combined entity is referred to as the Company). Following is a summary of the organizations included in the combined financial statements:
ENTITY RELATIONSHIP - ------------------------------------- ------------------------------------------------------- NEPCO Parent Corporation Northern Plastics Corporation Wholly-owned subsidiary of NEPCO Northern Plastics Corporation -- Wholly-owned subsidiary of NEPCO Puerto Rico NEPCO-West 100% owned by marital trust for which NEPCO shareholders are trustees
The shareholders of NEPCO hold a 51% interest in Molinero Tool and Die, Incorporated, an organization that produces and fabricates equipment that is used to place the plastic closures onto the bottles. This equipment is purchased by the Company and provided to customers as an incentive to purchase the Company's closures. Also, the shareholders of NEPCO are each 50% partners in CHR Enterprises, a partnership that purchases and retains real estate for investment purposes. These two organizations are not included in the combined financial statements. All significant intercompany transactions and balances have been eliminated in combination. INVENTORIES: All inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for raw materials, supplies and manufactured finished goods inventories at NEPCO, which comprise approximately 86% and 85% of all inventories at August 31, 1992 and 1993, respectively. The first-in, first-out method is used for all remaining inventories. PROPERTY AND EQUIPMENT: Property and equipment, including significant betterments, are stated at cost less accumulated depreciation and amortization. Depreciation charges are computed over the estimated useful lives, ranging from 5 to 45 years, using accelerated methods of depreciation. Maintenance and repairs are charged to expense as incurred. When assets are retired, sold or disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts and the resulting gains or losses are included in the results of operations. RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are charged to operations as incurred. PATENTS: Patents are valued at cost and amortized over their estimated lives on a straight line basis. REVENUE RECOGNITION: The Company recognizes revenue upon product shipment. F-28 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) CASH EQUIVALENTS: Investments and cash held in money market accounts with original maturities of three months or less are considered to be cash equivalents. DEFERRED INCOME TAXES: Certain items of income and expense are included in one reporting period for financial accounting purposes and another for income tax purposes. Deferred income taxes are provided to recognize the future tax effects of these temporary differences. NET INCOME PER COMMON SHARE: Net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period. For the purposes of calculating the combined weighted average number of common shares, the common shares of NEPCO and NEPCO-West are combined and treated as if they are equivalent in class. CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject the Company to concentrations of risk consist principally of cash and cash equivalents and trade receivables. The Company's cash and cash equivalents are invested in institutions that are insured by the FDIC. NEPCO's cash held at a FDIC insured institution at August 31, 1993 exceeded the FDIC insured limits. Management believes that the financial institutions which hold the Company's cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these assets. The Company's products are principally sold to entities in the dairy and juice industries in the United States. Ongoing credit evaluations of customer's financial condition are performed and collateral is generally not required. The Company maintains reserves for potential credit losses which, on a historical basis, have not been significant. In 1993, one customer accounted for approximately 11% of total sales made by the Company. INTERIM RESULTS (UNAUDITED) The accompanying Combined Balance Sheet at June 30,1994, the Combined Statement of Operations and Combined Statement of Cash Flows for the ten months ended June 30, 1994 and the Combined Statement of Retained Earnings for the ten months ended June 30, 1994 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods. The data disclosed in these notes to the consolidated financial statements for these periods are unaudited.
TEN MONTHS ENDED TWO MONTHS ENDED JUNE 30, 1993 AUGUST 31, 1994 ------------------ ------------------- (IN THOUSANDS) Revenues................................................................ $ 24,523 $ 7,245 Gross Profit............................................................ 6,334 1,961
RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform with the current year financial statement presentation. These reclassifications had no effect on net income. F-29 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. INVENTORIES:
AUGUST 31, -------------------- 1992 1993 --------- --------- (IN THOUSANDS) Finished goods............................................................................... $ 1,081 $ 1,053 Raw materials and supplies................................................................... 1,271 934 --------- --------- $ 2,352 $ 1,987 --------- --------- --------- ---------
If the FIFO inventory valuation method had been used exclusively, inventories would have been $318,000 and $255,000 higher at August 31, 1992 and 1993, respectively. 4. PROPERTY AND EQUIPMENT:
AUGUST 31, -------------------- 1992 1993 --------- --------- (IN THOUSANDS) Land and land improvements................................................................. $ 734 $ 734 Buildings and improvements................................................................. 4,941 4,978 Machinery and equipment.................................................................... 13,450 16,812 --------- --------- 19,125 22,524 Less accumulated depreciation and amortization............................................. 8,504 9,513 --------- --------- $ 10,621 $ 13,011 --------- --------- --------- ---------
Depreciation charged to operations was $983,000, $1,125,000 and $1,285,000 in 1991, 1992 and 1993, respectively. 5. REVOLVING LINE OF CREDIT: NEPCO has a revolving line of credit of $1,500,000 which has been fully drawn down at August 31, 1993. The line of credit is due within one year and bears interest at a fixed rate of 6%. The line of credit is collateralized by accounts receivables and other assets of NEPCO. See Note 6, Subsequent Revolving Debt Facility, for the amended terms of the line of credit. 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION:
AUGUST 31, -------------------- 1992 1993 --------- --------- (IN THOUSANDS) Mortgage note................................................................................ $ 2,582 $ 2,349 Equipment note............................................................................... 317 233 Notes payable................................................................................ 579 800 Capital lease obligation..................................................................... 118 63 Other........................................................................................ 64 34 --------- --------- 3,660 3,479 Less current portion......................................................................... 503 532 --------- --------- $ 3,157 $ 2,947 --------- --------- --------- ---------
MORTGAGE NOTE: The mortgage note was obtained to acquire the plant that NEPCO-West utilizes. Principal payments are due in monthly installments of $20,000 with the final payment due on September 1, 1995. Interest is F-30 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION: (CONTINUED) payable monthly on the outstanding balance at a fixed rate of 7.5% on the first $1,000,000 and 9% on the remaining balance. The note is collateralized by the land, building and equipment at the plant location acquired with the mortgage. In addition, NEPCO has assigned as collateral a $1,000,000 certificate of deposit to the bank related to this mortgage which is reflected in the balance sheet as a non-current asset. EQUIPMENT NOTE: The equipment note was obtained to acquire machinery and equipment for NEPCO's Sumter, South Carolina facility. Interest is payable monthly based on a variable rate established as 67% of the prime lending rate (6% at August 31, 1993). Principal is payable monthly in the amount of $7,000 with the final installment due on June 1, 1996. The note is collateralized by the machinery and equipment that was purchased with the proceeds. In addition, the shareholders of NEPCO have personally guaranteed this note. NOTES PAYABLE: The notes were issued in conjunction with the opening of the Fort Worth, Texas plant operated by NEPCO. The total note is structured into two separate payment structures: payments of $11,000 are payable monthly on $579,000 of the notes through 1997 and payments of $3,000 are payable monthly on $221,000 of the notes through 2000. Interest is payable monthly at a fixed rate of 6%. The note is collateralized by inventory and equipment located in the Fort Worth, Texas plant. CAPITAL LEASE OBLIGATION: NEPCO acquired a plant located in New Castle, Pennsylvania under a lease agreement with the local Industrial Development Authority. Lease payments are payable monthly in the amount of $5,000 through September 1994. The combined balance sheet includes the following items held under capital lease obligations:
AUGUST 31, -------------------- 1992 1993 --------- --------- (IN THOUSANDS) Building.......................................................................................... $ 900 $ 900 Land.............................................................................................. 65 65 --------- --------- 965 965 Less accumulated amortization..................................................................... 396 432 --------- --------- $ 569 $ 533 --------- --------- --------- ---------
Under the provisions of the lease agreement, NEPCO will make minimum annual payments of $61,000 in 1994 and $5,000 in 1995. Interest on the future minimum payments will be $3,000. At August 31, 1993, $58,000 is included as a current liability. SUBSEQUENT REVOLVING DEBT FACILITY: On December 28, 1993 the Company obtained a $9,000,000 revolving credit facility that was used to finance additional plant construction and refinance substantially all previous debt obligations. The credit is structured into three facilities: -$1,500,000 revolving credit facility that matures December 28, 1994 with an option to renew the facility on a year-to-year basis, at the option of the bank; interest is payable monthly at the prime lending rate. F-31 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION: (CONTINUED) -$3,700,000 revolving facility that matures on December 31, 1994 at which time the outstanding balance converts to a term loan payable monthly through December 1, 2000, with interest payable at a fixed rate of 7.75% through December 31, 1998, and at either a variable rate based on prime plus 0.5% or a fixed rate based on the current two year Treasury Bill rate plus 3%, selected by the Company through maturity. The facility provides for a penalty, based on the interest rates at the time of the prepayment, if the debt is prepaid prior to December 31, 1998. -$3,800,000 revolving facility that matures on December 31, 1994 at which time the outstanding balance converts to a term loan payable monthly through December 1, 2000, with interest payable at a fixed rate of 7.75% through December 31, 1998, and at either a variable rate based on prime plus 0.5% or a fixed rate based on the current two year Treasury Bill rate plus 3%, selected by the Company through maturity. The facility provides for a penalty, based on the interest rates at the time of the prepayment, if the debt is prepaid prior to December 31, 1998. The credit facilities are collateralized by all assets of the Company. The credit facilities have various covenants, including the maintenance of minimum levels of net worth, certain financial ratios, and restrictions on the amount of capital expenditures, additional indebtedness and dividends with which NEPCO and NEPCO-West must comply on a combined basis. These covenants became applicable in January 1994. At February 28, 1994, approximately $1,000,000 was available to pay dividends on preferred or common stock. The following table provides the maturities that are due on the long-term debt outstanding at August 31, 1993:
(IN THOUSANDS) 1994.............................................................................................. $ 532 1995.............................................................................................. 460 1996.............................................................................................. 2,089 1997.............................................................................................. 156 1998.............................................................................................. 169 Thereafter........................................................................................ 73 ------- $ 3,479 ------- -------
7. RELATED PARTY TRANSACTIONS: Included in the current due from related parties at August 31, 1992 and 1993 is $125,000 and $241,000, respectively, that was advanced to the shareholders' of NEPCO at various times over the past several years. The advances were made for various purposes, and do not have a note or a payment schedule attached to the advance. The shareholders intend to repay the advances over the next 12 months, thus the amounts have been classified as current assets at August 31, 1993. Also included in the current due from related parties for all periods presented is $45,000, which is owed to NEPCO by CHR Partnership. The advances resulted from NEPCO providing funds to CHR Partnership to make certain improvements to a building held as an investment by CHR Partnership. There are no payment terms, however, the shareholders of NEPCO intend to repay the amount due within the next 12 months, thus the receivable is classified as a current asset at August 31, 1993. Non-current note receivable from related parties for all periods presented is $142,000, which is owed to NEPCO by the marital trust that is the sole shareholder of NEPCO-West. These funds were advanced to the marital trust to be used for investment purposes. This receivable is supported by a note with interest payable annually at 11%. F-32 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 7. RELATED PARTY TRANSACTIONS: (CONTINUED) Included in the current due to related parties at August 31, 1992 and 1993 is $29,000 which is owed to the Estate of Clem Crisci. At August 31, 1992 and 1993, $202,000 and $173,000, respectively, are included in non-current due to related parties. Amounts are paid in annual installments of $29,000 with interest calculated at a fixed rate of 6% through June 30, 2000. Certain equipment that is used in placing the Company's closures onto the customers' containers is custom made for, and given to, certain customers by the Company. The Company utilizes Molinero Tool and Die, Incorporated (Molinero) to fabricate a significant portion of this equipment. Total purchases from Molinero in 1991, 1992 and 1993 were $202,000, $358,000 and $1,036,000, respectively. At August 31, 1992 and 1993, $191,000 and $246,000 is included in payable to related parties, respectively, to Molinero. Molinero shares part of NEPCO's New Castle, PA plant and pays NEPCO a monthly rental payment under a lease agreement. For the years ended August 31, 1991, 1992 and 1993, $17,000, $18,000 and $18,000, respectively was recorded as other income by NEPCO related to this agreement. At August 31, 1992 and 1993, $9,000 and $10,000, respectively, is included in due from related parties. NEPCO leases two facilities from CHR Partnership. The first lease is for a facility located in Sumter, South Carolina that requires NEPCO to make monthly lease payments of $10,000 through 1997, as well as additional amounts to pay for all taxes, insurance and maintenance on the property. The second lease is for a facility located in New Castle, PA, and requires NEPCO to make monthly lease payments of $1,000 through 1997, as well as additional amounts to pay for all taxes, insurance and maintenance on the property. Future minimum rental commitments on the leases is $528,000, comprised of $132,000 per year through 1997. As part of the agreement between NEPCO and CHR Partnership, NEPCO also makes the monthly mortgage payments to a financial institution on behalf of CHR Partnership. At August 31, 1992 and 1993, the Company has recorded a net payable to CHR of $126,000 and $54,000, respectively, related to the Sumter, South Carolina plant location. 8. COMMITMENTS AND CONTINGENCIES: NEPCO has a month to month lease for its plant located in Fort Worth, Texas that requires payments of $6,000 per month. The lease contains a purchase option for the building equal to the fair market value plus $50,000, in addition to the silos which can be purchased for $60,000. NEPCO has exercised this option and completed the purchase for approximately $500,000 in February 1994. Total rent expense included in the operating results for 1991, 1992 and 1993, respectively was $144,000, $197,000 and $205,000, of which $132,000 was paid to CHR Partnership annually. At August 31, 1992 and 1993, the Company has committed to purchase $462,000 and $1,139,000, respectively, of molds that will be used in the operations of the Company. Payment on these purchases is expected to be made within six months of the financial statement date. The Company was named in a lawsuit regarding a patent infringement at August 31, 1993. At August 31, 1993, the case was in the discovery stage and, therefore, no determination could be made of the outcome or the range of the possible loss, if any, should the outcome be unfavorable. Concurrent with the signing of the stock purchase agreement in March 1994, the case against the Company was terminated. See Note 11 for discussion of the subsequent merger agreement. F-33 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE BENEFIT PLANS: The company maintains a profit sharing plan for those employees who meet the eligibility requirements set forth in the Plan. Contributions to the Plan are determined annually by the Company's Board of Directors. The Company contributed $150,000 and $0 to the Plan for the years ended August 31, 1992 and 1993, respectively. In 1993 the Company instituted a 401(k) plan for those employees who meet the eligibility requirements set forth in the Plan. The Company matches amounts contributed to the Plan by the eligible employees. The Company contributed $17,000 to the Plan in 1993. 10. INCOME TAXES: Effective September 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The statement requires the use of the asset and liability approach for financial accounting and reporting for income taxes. The cumulative effect of the change in accounting principle of $104,000 has been included in determining net income for the current year. Financial statements for prior years have not been restated. The following table summarizes the provision for U.S. Federal and State income taxes.
YEARS ENDED AUGUST 31, ------------------------------- 1991 1992 1993 --------- --------- --------- Current: U.S. Federal Tax....................................................................... $ 447 $ 176 $ 128 State Tax.............................................................................. 114 58 45 --------- --------- --------- 561 234 173 Deferred: U.S. Federal Tax....................................................................... 43 61 (43) State Tax.............................................................................. 2 (6) 8 --------- --------- --------- 45 55 (35) --------- --------- --------- Total tax provision.................................................................. $ 606 $ 289 $ 138 --------- --------- --------- --------- --------- ---------
The 1992 deferred tax assets and liabilities are comprised principally of alternative minimum tax credits that are available to reduce future tax liabilities and depreciation, respectively. The 1993 tax provision benefited from an increase in deferred tax assets related to alternative minimum tax credits of $113 and other future deductible amounts of $57. The provision was reduced $127 due to an increase in deferred tax liabilities related to excess tax depreciation. The differences between the U.S. federal statutory tax rate and the NEPCO's combined effective tax rate at August 31, 1993 is as follows:
1991 1992 1993 --------- --------- --------- U.S. Federal statutory rate................................................................ 34.0% 34.0% 34.0% State income taxes, net.................................................................... 4.8 6.1 2.9 Other...................................................................................... 0.4 5.8 (0.2) --- --- --- 39.2% 45.9% 36.7% --- --- --- --- --- ---
F-34 NORTHERN ENGINEERING AND PLASTICS CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES: (CONTINUED) The deferred tax (assets) and deferred tax liabilities recorded on the balance sheet as of August 31, 1993 are as follows: Deferred assets: Benefit plans..................................................................... $ (44) AMT Tax credit carry forwards..................................................... (188) Operating loss carry forwards..................................................... (18) --------- Gross deferred tax assets......................................................... (250) Deferred liabilities: Depreciation...................................................................... 1,091 --------- Net deferred liabilities............................................................ $ 841 --------- ---------
At August 31, 1993, $188,000 of AMT credits were available. These credits do not expire and may be used to reduce future taxes payable. 11. SUBSEQUENT MERGER AGREEMENT: In March of 1994, NEPCO entered into a stock purchase agreement whereby Portola Packaging (d/b/a Cap Snap) of San Jose, California would acquire all of the capital stock of NEPCO and NEPCO-West for a purchase price of $28,500,000 plus additional commitments related to employment, non-compete and technology transfer agreements. The purchase was completed on June 30, 1994. 12. OTHER, NET: Other, net consists of gains from asset sales, accounts payable discounts, and other nonoperating items. F-35 AUDITORS' REPORT To the Directors of Portola Packaging Canada Ltd. We have audited the combined balance sheet of Portola Packaging Canada Ltd. as at March 31, 1995 and the combined statements of income, retained earnings and changes in financial position for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these combined financial statements present fairly, in all material respects, the financial position of Portola Packaging Canada Ltd. as at March 31, 1995 and the results of its operations and the changes in its financial position for the year then ended in accordance with Canadian generally accepted accounting principles. COOPERS & LYBRAND Vancouver, B.C. August 3, 1995 F-36 PORTOLA PACKAGING CANADA LTD. COMBINED BALANCE SHEET AS AT MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) ASSETS Current Assets Cash......................................................................... $ 965,653 Accounts receivable -- Trade...................................................................... 1,741,847 Affiliated companies....................................................... 70,409 Commissions (note 5)....................................................... 67,026 Fire claim receivable (note 9)............................................... 250,365 Inventories (note 3)......................................................... 580,750 Lease deposit................................................................ 8,533 ---------- 3,684,583 Goodwill....................................................................... 1 Fixed Assets (note 4).......................................................... 90,974 Equity in Canada Cap Snap Corporation (note 8)................................. 310,005 ---------- $4,085,563 ---------- ---------- LIABILITIES Current Liabilities Accounts payable -- Trade...................................................................... $ 645,664 Affiliated companies....................................................... 14,742 Bonus (note 5)............................................................. 1,291,092 Allwest Industries Incorporated (note 5)................................... 199,580 ---------- 2,151,078 Advances from Allwest Industries Incorporated (note 5)......................... 680,947 Loans from Related Parties (note 5)............................................ 1,218,141 ---------- 4,050,166 ---------- SHAREHOLDERS' EQUITY Share Capital (note 6)......................................................... 501 Retained Earnings.............................................................. 34,896 ---------- 35,397 ---------- $4,085,563 ---------- ---------- Contingency (note 9) Commitments (note 11)
The accompanying notes are an integral part of these combined financial statements. F-37 PORTOLA PACKAGING CANADA LTD. COMBINED STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) Deficit -- Beginning of Year................................................... $ (198,022) Net Income for the Year........................................................ 232,918 ---------- Retained Earnings -- End of Year............................................... $ 34,896 ---------- ----------
The accompanying notes are an integral part of these combined financial statements. F-38 PORTOLA PACKAGING CANADA LTD. COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) Sales (note 5)................................................................ $11,084,321 Cost of Sales Opening inventory........................................................... 489,485 Materials (note 5).......................................................... 5,618,623 Plant labour and benefits................................................... 1,279,779 Heat, light and power....................................................... 319,403 ----------- 7,707,290 Less: Closing inventory (note 3)............................................ 580,750 ----------- 7,126,540 ----------- Gross Profit.................................................................. 3,957,781 ----------- Plant Expenses Rental -- Equipment (note 5)................................................ 1,472,113 Building (note 5).................................................. 248,122 Trailer............................................................ 52,651 Depreciation and amortization............................................... 59,494 Repairs and maintenance..................................................... 251,522 Property taxes.............................................................. 31,010 Insurance................................................................... 45,876 Scavenging.................................................................. 2,281 ----------- 2,163,069 ----------- Administrative Expenses Salaries and benefits....................................................... 1,560,121 Interest (note 5)........................................................... 62,597 Travel...................................................................... 43,413 Professional fees........................................................... 48,459 Office...................................................................... 35,693 Other....................................................................... 42,565 ----------- 1,792,848 ----------- Income Before the Following: 1,864 ----------- Other Income Commission (note 5)......................................................... 67,026 Interest.................................................................... 63,023 Miscellaneous............................................................... 20,203 Equity in income of Canada Cap Snap Corporation (note 8).................... 80,802 ----------- 231,054 ----------- Income Before Income Taxes.................................................... 232,918 ----------- Income Taxes (note 7) Current..................................................................... 77,000 Income taxes recovered through utilization of tax losses carried forward.... (77,000) ----------- Nil ----------- Net Income for the Year....................................................... $ 232,918 ----------- -----------
The accompanying notes are an integral part of these combined financial statements. F-39 PORTOLA PACKAGING CANADA LTD. COMBINED STATEMENT OF CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) CASH PROVIDED BY (USED IN) Operating Activities Net income for year........................................................... $ 232,918 Items not affecting cash -- Depreciation................................................................ 59,494 Equity in net income of Canada Cap Snap Corporation......................... (80,802) --------- 211,610 --------- Changes in non-cash working capital -- Accounts receivable......................................................... (666,357) Inventories................................................................. (91,265) Accounts payable............................................................ 306,288 --------- (451,334) --------- (239,724) --------- Financing Activities Loans from related parties.................................................... 556,875 Due to Allwest Industries Incorporated........................................ 5,997 --------- 562,872 --------- Investing Activities Leasehold improvements........................................................ (57,700) Purchase of automobile........................................................ (12,490) Fire claim receivable......................................................... (58,279) Fire claim insurance proceeds................................................. 100,000 --------- (28,469) --------- Increase in Cash................................................................ 294,679 Cash -- Beginning of Year....................................................... 670,974 --------- Cash -- End of Year............................................................. $ 965,653 --------- ---------
The accompanying notes are an integral part of these combined financial statements. F-40 PORTOLA PACKAGING CANADA LTD. NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) 1. BASIS OF ACCOUNTING PRESENTATION On June 16, 1995, 3154823 Canada Inc., a wholly owned subsidiary of Portola Packaging, Inc., acquired 100% of the shares of B.C. Plastic Industries Ltd. and Alberta Plastic Industries Ltd. and 50% of the shares of a joint venture, Canada Cap Snap Corporation (the remaining 50% thereof already being owned by Portola Packaging, Inc.). The acquired shares were previously held under common control and, accordingly, these financial statements reflect the financial position and results of operations of the acquired companies on a combined historical cost basis, with the 50% joint venture interest in Canada Cap Snap Corporation being accounted for using the equity method. Transactions amongst the combining companies have been eliminated. On June 16, 1995, 3154823 Canada Inc., B.C. Plastic Industries Ltd., Alberta Plastic Industries Ltd. and Canada Cap Snap Corporation were amalgamated under the name Portola Packaging Canada Ltd. 2. ACCOUNTING POLICIES These combined financial statements have been prepared in accordance with Canadian generally accepted accounting principles. INVENTORIES Inventories are recorded at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. FIXED ASSETS The automobile is recorded at cost and is depreciated on a 30% declining balance basis. Under the terms of the company's lease agreements with Allwest Industries Incorporated (Allwest), the company is responsible for installing all leased equipment. The installation costs are capitalized as leasehold improvements. Leasehold improvements are recorded at cost and amortization is provided on the straight-line basis over five years. 3. INVENTORIES Materials-- Raw.................................................... $ 339,698 Packaging.............................................. 75,426 Finished goods........................................... 165,626 --------- $ 580,750 --------- ---------
4. FIXED ASSETS
ACCUMULATED NET BOOK COST DEPRECIATION VALUE ----------- ------------- --------- Leasehold improvements...................... $ 130,886 $ 50,528 $ 80,358 Automobile.................................. 12,490 1,874 10,616 ----------- ------------- --------- $ 143,376 $ 52,402 $ 90,974 ----------- ------------- --------- ----------- ------------- ---------
F-41 PORTOLA PACKAGING CANADA LTD. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) 5. RELATED PARTY TRANSACTIONS Canada Cap Snap Corporation and Canadian Miraclean Products Ltd. are affiliated companies. Allwest Industries Incorporated (Allwest) is the parent of B.C. Plastic Industries Ltd. and 322597 B.C. Limited is a shareholder of Canada Cap Snap Corporation. COMMISSION INCOME Commission income of $67,026 is due from Canada Cap Snap Corporation. SALES Sales to affiliates are as follows: Canada Cap Snap Corporation.............................. $ 377,583 Canadian Miraclean Products Ltd.......................... 47,304 --------- $ 424,887 --------- ---------
MANAGEMENT AND ADMINISTRATION FEES During the year Canada Cap Snap Corporation paid management fees amounting to $65,625 to Portola Packaging, Inc. and 322597 B.C. Limited, and administration fees of $13,800 to Canadian Miraclean Products Ltd. EQUIPMENT AND BUILDING RENTAL EXPENSES The company rented its premises and equipment from Allwest. Rental payments to Allwest included in equipment and building rental expense for the year amounted to $1,708,444. MATERIAL PURCHASES Purchases of finished goods and materials from Canada Cap Snap Corporation for the year amounted to $11,407 ACCOUNTS PAYABLE Accounts payable to Allwest are non-interest bearing and arise from current rental charges. ADVANCES FROM ALLWEST INDUSTRIES INCORPORATED Advances from Allwest bear interest at prime plus 2% and have no stated terms of repayment. Interest expense on these advances amounted to $62,597 during the year. LOANS FROM RELATED PARTIES The loans are unsecured and interest free with no fixed terms of repayment. The loans are from: 322597 B.C. Ltd........................................ $ 500 Allwest................................................ 615,205 Directors of the combined companies.................... 602,436 ---------- $1,218,141 ---------- ----------
BONUS The bonus is payable to directors of the Company. OTHER RELATED PARTY TRANSACTIONS Other related party transactions are disclosed in notes 9 and 11. F-42 PORTOLA PACKAGING CANADA LTD. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) 6. SHARE CAPITAL Share capital of the combined companies consists of the following: Alberta Plastic Industries Ltd. -- Authorized -- Unlimited Class A common shares without par value 500 Class B common shares, without par value 500 First preferred shares, 0-5% non-cumulative redeemable at $929.714 per share, without par value 500 Second preferred shares, 0-8% non-cumulative redeemable at $2,570.29 per share, without par value Issued -- 500 Class A common shares........................ $ 5 500 First preferred shares....................... 150 500 Second preferred shares...................... 345 --------- 500 --------- B.C. Plastic Industries Ltd. -- Authorized -- 1,000,000 Class A non-voting preferred shares, with a par value of $0.01, redeemable at $50,000 per share and entitled to a 10% non-cumulative dividend 100,000 Class B voting common shares without par value Issued-- 100 Class A shares............................... 1 1 Class B share................................ -- --------- 1 --------- 501 --------- ---------
7. INCOME TAXES The company has income tax loss carryforwards available to offset future taxable income of approximately $366,500. Unless utilized to reduce taxable income, these losses will expire as follows: 2000..................................................... $ 171,000 2001..................................................... 195,500 --------- $ 366,500 --------- ---------
The income tax loss carryforwards are represented by accounting losses of $254,500 and by timing differences of $112,000. The income tax benefit of the accounting losses has not been recorded. F-43 PORTOLA PACKAGING CANADA LTD. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED MARCH 31, 1995 (EXPRESSED IN CANADIAN DOLLARS) 8. INVESTMENT IN CANADA CAP SNAP CORPORATION The combined companies' 50% joint venture interest in Canada Cap Snap Corporation at March 31, 1995 comprised the following: Equity in retained earnings--beginning of year........... $ 229,203 50% of earnings for the year............................. 80,802 --------- Equity in retained earnings--end of year................. $ 310,005 --------- ---------
The combined companies pro rated share of the joint ventures' operations and financial position are as follows: Assets................................................... $ 528,000 --------- --------- Liabilities.............................................. $ 161,000 --------- --------- Revenues................................................. $ 730,000 --------- --------- Expenses................................................. $ 650,000 --------- ---------
9. CONTINGENCY During the year ended March 31, 1994, the building owned by Allwest and leased by Alberta Plastic Industries Ltd. for its operations was fire damaged. Both Allwest and the company expect to be fully compensated for any related damages; however, as yet no settlement has been reached with the insurance company. On June 15, 1995, the fire claim receivable was acquired by Allwest and directors for consideration in the amount of $250,365. 10. SECURITY FOR OPERATING LINE FACILITY B.C. Plastic Industries Ltd. has provided a general security covering all assets of the company and specific security covering the company's inventory in favour of the company's bankers as security for its operating line facility to a maximum of $350,000. 11. COMMITMENTS As at March 31, 1995, Alberta Plastic Industries Ltd. has monthly lease obligations related to its premises and its equipment of $12,000 and $49,400 respectively. The company is leasing temporary operating premises and is attempting to obtain a new permanent plant facility to be owned by Allwest. As at March 31, 1995, B.C. Plastic Industries Ltd. has monthly lease obligations to Allwest related to its premises and equipment of $12,144 and $76,631 respectively. F-44 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 3 Risk Factors................................... 10 Use of Proceeds................................ 14 Capitalization................................. 15 Unaudited Pro Forma As Adjusted Condensed Consolidated Financial Data................... 16 Selected Historical Condensed Consolidated Financial Data................................ 22 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 24 Business....................................... 33 Management..................................... 44 Certain Transactions........................... 50 Principal Stockholders......................... 52 Description of the New Credit Facility......... 54 Description of the Notes....................... 55 Underwriting................................... 77 Legal Matters.................................. 78 Experts........................................ 78 Additional Information......................... 78 Index to Financial Statements.................. F-1
------------------------ UNTIL DECEMBER 26, 1995, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. $110,000,000 [LOGO] PORTOLA PACKAGING, INC. 10 3/4% SENIOR NOTES DUE 2005 --------------------- PROSPECTUS --------------------- CHASE SECURITIES, INC. SALOMON BROTHERS INC - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following table sets forth information regarding all securities of the Registrant (or its predecessors) sold by the Registrant (or its predecessors) since June 1, 1993.
NUMBER OF AGGREGATE FORM OF CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SHARES PURCHASE PRICE CONSIDERATION - --------------------------------------- ------------------ -------------------- --------- -------------- ----------------- Chase Manhattan Capital Corporation June 9, 1995 Class B Common 200,000 $ 800,000.00 cash Stock, Series 1 June 30, 1994 Warrant to purchase -- 1,245,205.95 (1) 2,052,526 shares of Class A Common Stock June 30, 1994 Class B Common 800,000 3,000,000.00 cash Stock, Series 1 Heller Financial, Inc. June 9, 1995 Class B Common 250,000 1,000,000.00 cash Stock, Series 1 June 30, 1994 Warrant to purchase -- 1,100,537.50 (2) 440,215 shares of Class A Common Stock Jack L. Watts, John L. Lemons, Mary Ann October 10, 1995 Class A Common Stock 2,134,992 (3) (3) Lemons, LJL Cordovan Partners, L.P. and Robert Fleming Nominees Limited Jeffrey Pfeffer, Ph.D. June 18, 1996 Class B Common 15,000 67,500 cash Stock, Series 1 Exercise of stock options granted under June 1, 1993 - Class B Common 848,732 563,002.40 cash stock option plans by 13 optionees June 18, 1996 Stock, Series 1 (Stock Options)
- ------------------------------ (1) Exchanged for Warrant to purchase 2,052,526 shares of Class A Common Stock issued October 9, 1992. (2) Exchanged for Warrant to purchase 440,215 shares of Class A Common Stock issued October 9, 1992. (3) Issued in exchange for 734,992 shares of Class B Common Stock, Series 1 of the Company and 1,400,000 shares of Class B Common Stock, Series 2 of the Company. The recipients of the Class A Common Stock then sold such shares to an unrelated third party and its affiliate. All sales of common stock made pursuant to the exercise of stock options granted under the stock option plans of the Registrant or its predecessors were made pursuant to the exemption from the registration requirements of the Securities Act of 1993, as amended (the "Securities Act"), afforded by Rule 701 promulgated under the Securities Act. The sales of securities to Chase Manhattan Capital Corporation, Heller Financial, Inc. and Dr. Pfeffer were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. The securities were sold to a limited number of people with no general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate the investment and represented to the issuer that the shares were being acquired for investment. The exchange of securities with Jack L. Watts, John L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P. and Robert Fleming Nominees Limited was made pursuant to the exemption from the registration requirements of the Securities Act afforded by Section 3(a)(9) of the Securities Act. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ----------- -------------------------------------------------------------------------------------------------------- 3.01 Certificate of Incorporation (filed with Secretary of State of Delaware on April 29, 1994, as amended and filed with Secretary of State of Delaware on October 4, 1995).* 4.01 Indenture, dated as of October 2, 1995, by and between the Registrant and American Bank National Association, as trustee (including form of Note).* 5.01 Opinion of Fenwick & West regarding legality of the Notes.** 10.24 Second Amended and Restated Credit and Security Agreement, dated as of October 2, 1995, by and between the Registrant and Heller Financial, Inc.* 10.25 Stock Purchase Agreement, dated October 10, 1995, by and among the Registrant, Jack L. Watts, John L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees Limited, Suez Equity Investors, L.P. and SEI Associates.* 10.26 Amendment to Investors' Rights Agreements, dated as of October 10, 1995, by and among the Registrant, Jack L. Watts, John L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees Limited, Suez Equity Investors, L.P., SEI Associates and Chase Manhattan Capital Corporation.* 10.27 Third Amended and Restated Registration Rights Agreement, dated as of October 10, 1995, by and among the Registrant, Heller Financial, Inc., Chase Manhattan Capital Corporation, Robert Fleming Nominees Limited, Suez Equity Investors, L.P. and SEI Associates.* 10.28 1988 Stock Option Plan and related documents.* 10.29 1994 Stock Option Plan and related documents.* 10.30 1996 Special Management Bonus Plan.* 10.31 1996 Management Bonus Plan.* 10.32 Description of provisions of 1996 Senior Executive Bonus Plans.* 10.33 Faulstich Court Property Agreement of Purchase and Sale, dated as of January 17, 1996, by and between the Registrant and Three Sisters Ranch Enterprises.*** 11.01 Computation of Net Income Per Share. 12.01 Computation of Ratio of Earnings to Fixed Charges. 21.01 Subsidiaries of the Registrant. 23.01 Consent of Fenwick & West (included in Exhibit 5.01).** 23.05 Consent of Coopers & Lybrand L.L.P. 27.01 Financial Data Schedule
- ------------------------ *Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the period ended November 30, 1995, as filed with the Securities and Exchange Commission on January 16, 1996. **Previously filed as Exhibit 5.01 to pre-effective Amendment No. 2 to this Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on September 25, 1995. ***Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the period ended February 29, 1996, as filed with the Securities and Exchange Commission on April 15, 1996. (b) The following financial statement schedule is filed herewith:
SCHEDULE NUMBER SCHEDULE TITLE - -------------- -------------------------------------------------------------------------------------------------- Schedule II Valuation and Qualifying Accounts.
II-2 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Post-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 25th day of June, 1996. PORTOLA PACKAGING, INC. By: /s/ JACK L. WATTS ----------------------------------- Jack L. Watts CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------------------------------ -------------------------------- ----------------------- PRINCIPAL EXECUTIVE OFFICER: /s/ JACK L. WATTS Chief Executive Officer, ------------------------------------------- Chairman of the Board and a June 25, 1996 Jack L. Watts Director PRINCIPAL FINANCIAL OFFICER: /s/ ROBERT R. STRICKLAND ------------------------------------------- Vice President -- Finance and June 25, 1996 Robert R. Strickland Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: /s/ DAVID A. KEEFE ------------------------------------------- Corporate Controller June 25, 1996 David A. Keefe
II-3 NAME TITLE DATE - ------------------------------------------------------ -------------------------------- ----------------------- ADDITIONAL DIRECTORS: /s/ CHRISTOPHER C. BEHRENS - ------------------------------------------- Director June 25, 1996 Christopher C. Behrens /s/ MARTIN R. IMBLER - ------------------------------------------- Director June 25, 1996 Martin R. Imbler /s/ TIMOTHY TOMLINSON - ------------------------------------------- Secretary and Director June 25, 1996 Timothy Tomlinson /s/ LARRY C. WILLIAMS - ------------------------------------------- Director June 25, 1996 Larry C. Williams /s/ JEFFREY PFEFFER, Ph.D. - ------------------------------------------- Director June 25, 1996 Jeffrey Pfeffer, Ph.D.
II-4 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE In connection with our audits of the consolidated financial statements of Portola Packaging, Inc. and Subsidiaries as of August 31, 1994 and 1995, and for each of the three years in the period ended August 31, 1995, which financial statements are included in the registration statement, we have also audited the financial statement schedule listed in Item 16(b) herein. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Jose, California November 1, 1995 S-1 PORTOLA PACKAGING, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS BEG BAL EXPENSE OTHER DEDUCTIONS (2) END BAL - ------------------------------------------------------ ----------- ----------- ------------- ----------------- ----------- August 31, 1993....................................... $ 167 $ 90 $ -- $ 51 $ 206 August 31, 1994....................................... 206 173 (167)(1) 157 389 August 31, 1995....................................... 389 892 468 813
- ------------------------ (1) Amount of valuation allowance established as part of the acquisition of NEPCO. (2) Write-off bad debts. S-2 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - ----------- -------------------------------------------------------------------------------------------------------- 3.01 Certificate of Incorporation (filed with Secretary of State of Delaware on April 29, 1994, as amended and filed with Secretary of State of Delaware on October 4, 1995).* 4.01 Indenture, dated as of October 2, 1995, by and between the Registrant and American Bank National Association, as trustee (including form of Note).* 5.01 Opinion of Fenwick & West regarding legality of the Notes.** 10.24 Second Amended and Restated Credit and Security Agreement, dated as of October 2, 1995, by and between the Registrant and Heller Financial, Inc.* 10.25 Stock Purchase Agreement, dated October 10, 1995, by and among the Registrant, Jack L. Watts, John L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees Limited, Suez Equity Investors, L.P. and SEI Associates.* 10.26 Amendment to Investors' Rights Agreements, dated as of October 10, 1995, by and among the Registrant, Jack L. Watts, John L. Lemons, Mary Ann Lemons, LJL Cordovan Partners, L.P., Robert Fleming Nominees Limited, Suez Equity Investors, L.P., SEI Associates and Chase Manhattan Capital Corporation.* 10.27 Third Amended and Restated Registration Rights Agreement, dated as of October 10, 1995, by and among the Registrant, Heller Financial, Inc., Chase Manhattan Capital Corporation, Robert Fleming Nominees Limited, Suez Equity Investors, L.P. and SEI Associates.* 10.28 1988 Stock Option Plan and related documents.* 10.29 1994 Stock Option Plan and related documents.* 10.30 1996 Special Management Bonus Plan.* 10.31 1996 Management Bonus Plan.* 10.32 Description of provisions of 1996 Senior Executive Bonus Plans.* 10.33 Faulstich Court Property Agreement of Purchase and Sale, dated as of January 17, 1996, by and between the Registrant and Three Sisters Ranch Enterprises.*** 11.01 Computation of Net Income Per Share. 12.01 Computation of Ratio of Earnings to Fixed Charges. 21.01 Subsidiaries of the Registrant. 23.01 Consent of Fenwick & West (included in Exhibit 5.01).** 23.05 Consent of Coopers & Lybrand L.L.P. 27.01 Financial Data Schedule
- ------------------------ * Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the period ended November 30, 1995, as filed with the Securities and Exchange Commission on January 16, 1996. ** Previously filed as Exhibit 5.01 to pre-effective Amendment No. 2 to this Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on September 25, 1995. *** Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the period ended February 29, 1996, as filed with the Securities and Exchange Commission on April 15, 1996. EX-11.01 2 EXHIBIT 11.01 EXHIBIT 11.01 PORTOLA PACKAGING, INC. COMPUTATION OF NET INCOME PER SHARE (1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE SIX MONTHS ENDED YEAR ENDED AUGUST 31, -------------------------- ------------------------------- FEBRUARY 28, FEBRUARY 29, 1993 1994 1995 1995 1996 --------- --------- --------- ------------ ------------ UNAUDITED Weighted average common shares outstanding for the period 9,976 11,087 11,393 11,255 11,585 Common equivalent shares assuming conversion of stock options and warrants under the treasury stock method...................................... 2,578 --------- --------- --------- ------------ ------------ Shares used in per share calculation............... 12,554 11,087 11,393 11,255 11,585 --------- --------- --------- ------------ ------------ --------- --------- --------- ------------ ------------ Income (loss) before extraordinary item and cumulative effect of change in accounting principle......................................... $ 1,198 $ 1,100 $ 140 $ 231 $ (200) Less the increase in the put value of warrants..... (455) (610) (279) (423) --------- --------- --------- ------------ ------------ $ 1,198 $ 645 $ (470) $ (48) $ (623) --------- --------- --------- ------------ ------------ --------- --------- --------- ------------ ------------ Cumulative effect of change in accounting principle......................................... $ 85 --------- --------- --------- ------------ ------------ --------- --------- --------- ------------ ------------ Extraordinary item................................. $ 1,265 --------- --------- --------- ------------ ------------ --------- --------- --------- ------------ ------------ Net income (loss).................................. $ 309 $ 225 $ 140 $ 231 $ (1,465) Less the increase in the put value of warrants..... (455) (610) (279) (423) --------- --------- --------- ------------ ------------ $ 309 $ (230) $ (470) $ (48) $ (1,888) --------- --------- --------- ------------ ------------ --------- --------- --------- ------------ ------------ Net income (loss) per share before extraordinary item and cumulative effect of change in accounting principle......................................... $ 0.10 $ 0.06 $ (0.04) $ 0.00 $ (0.05) Cumulative effect of change in accounting principle......................................... $ 0.01 Effect of extraordinary item per share............. $ (0.11) Net income (loss) per share........................ $ 0.02 $ (0.02) $ (0.04) $ 0.00 $ (0.16)
- ------------------------ (1) There is no difference between primary and fully diluted net income (loss) per share for all periods presented. EX-12.01 3 EXHIBIT 12.01 EXHIBIT 12.01 PORTOLA PACKAGING, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, -------------------------- ----------------------------------------------------------- FEBRUARY 28, FEBRUARY 29, 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------------- --------- ------------ ------------ Fixed charges: Interest expense........ $ 3,972 $ 3,200 $ 3,128 $ 3,996 $ 8,658 $ 4,003 $ 6,380 Debt financing costs.... 418 969 479 1,058 447 269 261 Rent expense............ 269 284 295 465 499 240 344 --------- --------- --------- ------- --------- ------------ ------------ Total interest........ 4,659 4,453 3,902 5,519 9,604 4,512 6,985 Total fixed charges....... 4,659 4,453 3,902 5,519 9,604 4,512 6,985 Less: Capitalized interest................. -- -- -- -- -- -- -- --------- --------- --------- ------- --------- ------------ ------------ Net fixed charges....... $ 4,659 $ 4,453 $ 3,902 $ 5,519 $ 9,604 $ 4,512 $ 6,985 --------- --------- --------- ------- --------- ------------ ------------ --------- --------- --------- ------- --------- ------------ ------------ Earnings: Net income (loss)....... $ 455 $ 663 $ 309 $ 225 $ 140 $ 231 $ (1,465) Income tax benefit from extraordinary item..... -- -- (592) (539) -- -- (844) Cumulative effect of adopting SFAS No. 109.................... -- -- -- 85 -- -- -- Provision for taxes..... 1,301 1,287 1,521 1,095 1,294 730 755 Net fixed charges....... 4,659 4,453 3,902 5,519 9,604 4,512 6,985 --------- --------- --------- ------- --------- ------------ ------------ Total earnings.......... $ 6,415 $ 6,403 $ 5,140 $ 6,385 $ 11,038 $ 5,473 $ 5,431 --------- --------- --------- ------- --------- ------------ ------------ --------- --------- --------- ------- --------- ------------ ------------ Calculation of ratio of earnings to fixed charges: Total earnings.......... $ 6,415 $ 6,403 $ 5,140 $ 6,385 $ 11,038 $ 5,473 $ 5,431 Total fixed charges..... 4,659 4,453 3,902 5,519 9,604 4,512 6,985 Ratio of earnings to fixed charges.......... 1.38 1.44 1.32 1.16 1.15 1.21 Deficiency of earnings to fixed charges....... (1,554)
EX-21.01 4 EXHIBIT 21.01 EXHIBIT 21.01 SUBSIDIARIES OF PORTOLA PACKAGING, INC., A DELAWARE CORPORATION Portola Packaging Canada Ltd., a Canadian federal corporation (operating) Portola Packaging Ltd., a U.K. corporation (formerly Cap Snap Limited, a U.K. corporation, which was formerly Cap Snap (U.K.) Ltd.) (operating but not significant pursuant to Item 601 of Regulation S-K) EX-23.05 5 EXHIBIT 23.05 EXHIBIT 23.05 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this post-effective amendment number one to the registration statement on Form S-1 (File No. 33-95318) of our report dated November 1, 1995, on our audits of the financial statements and financial statement schedule of Portola Packaging, Inc. We also consent to the reference to our firm under the caption "Experts." COOPERS & LYBRAND L.L.P. San Jose, California June 24, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 6-MOS AUG-31-1995 AUG-31-1996 SEP-01-1994 SEP-01-1995 AUG-31-1995 FEB-29-1996 763 14526 1000 0 20323 20267 813 660 9833 10193 36467 50171 53132 64059 27203 0 130326 156557 21709 17817 86244 116979 0 0 0 0 12 12 6682 4810 130326 156557 124650 73877 124650 73877 91972 55857 110303 65109 3983 2256 0 0 9105 6641 1434 555 1294 755 140 (200) 0 0 0 1265 0 0 140 (1465) (0.04) (0.16) (0.04) (0.16) SHOWN NET OF ALLOWANCE SHOWN NET OF DEPRECIATION
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